-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, IEAQM8fIK/x8c/iY7R8pBlX9zU+d/h0URVsCWvln0Gi3y41CTqeDA68bJRWVjBkA rZe1nFKAPaAylPmM9MHepw== 0000950109-97-003477.txt : 19970502 0000950109-97-003477.hdr.sgml : 19970502 ACCESSION NUMBER: 0000950109-97-003477 CONFORMED SUBMISSION TYPE: 485B24F PUBLIC DOCUMENT COUNT: 11 FILED AS OF DATE: 19970501 EFFECTIVENESS DATE: 19970501 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: SECURITY LIFE SEPARATE ACCOUNT L1 CENTRAL INDEX KEY: 0000917677 STANDARD INDUSTRIAL CLASSIFICATION: UNKNOWN SIC - 0000 [0000] IRS NUMBER: 840499703 STATE OF INCORPORATION: CO FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 485B24F SEC ACT: 1933 Act SEC FILE NUMBER: 033-88148 FILM NUMBER: 97592688 BUSINESS ADDRESS: STREET 1: 1290 BROADWAY STREET 2: C/O SECURITY LIFE CENTER CITY: DENVER STATE: CO ZIP: 80203 BUSINESS PHONE: 3038601290 MAIL ADDRESS: STREET 1: 1290 BROADWAY STREET 2: 1290 BROADWAY CITY: DENVER STATE: CO ZIP: 80203-5699 485B24F 1 POST EFFECTIVE AMENDMENT NO. 4 As filed with the Securities and Exchange Commission on April 30, 1997 Registration No. 33-88148 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 _________________ FORM S-6 FOR REGISTRATION UNDER THE SECURITIES ACT OF 1933 OF SECURITIES OF UNIT INVESTMENT TRUSTS REGISTERED ON FORM N-8B-2 Post-Effective Amendment No. 2 _________________ SECURITY LIFE SEPARATE ACCOUNT L1 (Exact Name of Trust) SECURITY LIFE OF DENVER INSURANCE COMPANY (Name of Depositor) 1290 Broadway Denver, Colorado 80203-5699 (Address of Depositor's Principal Executive Offices)
Copy to: GARY W. WAGGONER, ESQ. DIANE E. AMBLER, ESQ. Security Life of Denver Insurance Mayer, Brown & Platt Company 2000 Pennsylvania Avenue, N.W. 1290 Broadway Washington, D.C. 20006-1882 Denver, Colorado 80203-5699 (202) 778-0641 (Name and Address of Agent for Service)
________________ It is proposed that this filing will become effective: ___ on (date) pursuant to paragraph (a) of Rule 485 ___ 60 days after filing pursuant to paragraph (a) of Rule 485 X on May 1, 1997 pursuant to paragraph (b) of Rule 485 --- ___ immediately upon filing pursuant to paragraph (b) of Rule 485 ___ this post-effective amendment designates a new effective date for a previously filed post-effective amendment Title and amount of securities being registered: Interests under variable life insurance policies. Approximate Date of Proposed Public Offering: As soon as practical after the effective date. Pursuant to Rule 24f-2 under the Investment Company Act of 1940, the Registrant has registered an indefinite amount of securities. Registrant filed its Form 24f-2 on March 3, 1997 for its most recent fiscal year ending December 31, 1996. SECURITY LIFE SEPARATE ACCOUNT L1 (File No. 33-88148) Cross-Reference Table
Form N-8B-2 Item No. Caption in Prospectus - -------------------- --------------------- 1, 2 Cover; Security Life of Denver Insurance Company; Security Life Separate Account L1 3 Inapplicable 4 Security Life of Denver Insurance Company 5, 6 Security Life Separate Account L1 7 Inapplicable 8 Financial Statements 9 Inapplicable 10(a), (b), (c), (d), (e) Policy Summary; Policy Values, Determining the Value of Amounts in the Divisions of the Variable Account; Charges, Deductions and Refunds; Surrender; Partial Withdrawals; The Guaranteed Interest Division; Transfers of Account Values; Right to Exchange Policy; Lapse; Reinstatement; Premiums 10(f) Voting Privileges; Right to Change Operations 10(g), (h) Right to Change Operations 10(i) Tax Considerations; Detailed Information about the Strategic Advantage Variable Universal Life Policy; Other General Policy Provisions; The Guaranteed Interest Division 11, 12 Security Life Separate Account L1 13 Policy Summary; Charges, Deductions and Refunds; Corporate Purchasers and Group or Sponsored Arrangements
(ii)
Form N-8B-2 Item No. Caption in Prospectus - -------------------- --------------------- 14, 15 Policy Summary; Free Look; Other General Policy Provisions; Applying for a Policy 16 Premiums; Allocation of Net Premiums; How We Calculate Accumulation Unit Values for Each Division 17 Payment; Surrender; Partial Withdrawal 18 Policy Summary; Tax Considerations; Detailed Information about the Strategic Advantage Variable Universal Life Policy; Security Life Separate Account L1; Persistency Refund 19 Reports to Policy Owners; Notification and Claims Procedures; Performance Information 20 See 10(g) & 10(a) 21 Policy Loans 22 Policy Summary; Premiums; Grace Period; Security Life Separate Account L1; Detailed Information about the Strategic Advantage Variable Universal Life Policy 23 Inapplicable 24 Inapplicable 25 Security Life of Denver Insurance Company 26 Inapplicable 27, 28, 29, 30 Security Life of Denver Insurance Company 31, 32, 33, 34 Inapplicable 35 Inapplicable 36 Inapplicable
(iii)
Form N-8B-2 Item No. Caption in Prospectus - -------------------- --------------------- 37 Inapplicable 38, 39, 40, 41(a) Other General Policy Provisions; Distribution of the Policies; Security Life of Denver Insurance Company 41(b), 41(c), 42, 43 Inapplicable 44 Determining the Value in the Divisions of the Variable Account; How We Calculate Accumulation Unit Values for Each Division 45 Inapplicable 46 Partial Withdrawals; Detailed Information about the Strategic Advantage Variable Universal Life Policy 47, 48, 49, 50 Inapplicable 51 Detailed Information about the Strategic Advantage Variable Universal Life Policy 52 Determining the Value in the Divisions of the Variable Account; Right to Change Operations 53(a) Tax Considerations 53(b), 54, 55 Inapplicable 56, 57, 58 Inapplicable 59 Financial Statements
(iv) STRATEGIC ADVANTAGE VARIABLE UNIVERSAL LIFE A FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY issued by SECURITY LIFE OF DENVER INSURANCE COMPANY AND SECURITY LIFE SEPARATE ACCOUNT L1 This prospectus describes Strategic Advantage, an individual flexible premium variable universal life insurance policy (the "Policy" or collectively, "Policies") issued by Security Life of Denver Insurance Company ("Security Life"). The Policy provides insurance coverage with flexibility in death benefits and premium payments. The Policy is designed primarily for use on a multiple-life basis where the Insureds share a common employment or business relationship, and it may be owned individually or by a corporation, trust, association or similar entity. The Policy is funded by Security Life Separate Account L1 (the "Variable Account"). Seventeen Divisions of the Variable Account are available under the Policy. A Guaranteed Interest Division, which guarantees a minimum fixed rate of interest, is also available. Purchasers may utilize both the Divisions of the Variable Account and the Guaranteed Interest Division simultaneously. The Loan Division represents amounts we set aside as collateral for any Policy Loans taken. We will pay the Death Proceeds when the Insured dies if the Policy is still in force. The Death Proceeds will equal the death benefit, reduced by any outstanding Policy Loan, accrued loan interest, and any charges due during the grace period. The death benefit consists of two elements: the Base Death Benefit and any amount added by Rider. The Policy will remain in force as long as the Net Account Value remains positive. If at all times during the first three Policy years, the sum of premiums paid minus Partial Withdrawals taken and any Policy Loan and accrued loan interest is greater than or equal to one twelfth of the Minimum Annual Premium times the number of completed months this Policy has been in effect, the Policy will not lapse regardless of the amount of the Net Account Value. If the Guaranteed Minimum Death Benefit provision is purchased, the Stated Death Benefit portion of the Policy will remain in force for the Guarantee Period. To continue the Guarantee Period, the required premiums must be paid and the Net Account Value must remain diversified. The Policy permits the Owner to choose from three death benefit options which may increase the Base Death Benefit above the Stated Death Benefit: Option 1, a fixed benefit that equals the Stated Death Benefit; Option 2, a benefit that equals the Stated Death Benefit plus the Account Value; or Option 3, a benefit that equals the Stated Death Benefit plus the sum of premiums paid minus Partial Withdrawals taken to date. The Base Death Benefit in force as of any Valuation Date will not be less than the amount necessary to qualify the Policy as a life insurance contract under the Internal Revenue Code in existence at the time the Policy is issued. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. THIS PROSPECTUS SHOULD BE READ AND RETAINED FOR FUTURE REFERENCE. A PROSPECTUS FOR THE PORTFOLIO OR PORTFOLIOS BEING CONSIDERED MUST ACCOMPANY THIS PROSPECTUS AND SHOULD BE READ IN CONJUNCTION HEREWITH. DATE OF PROSPECTUS: MAY 1, 1997 When applying for the Policy, the Owner will irrevocably choose which of two tests for compliance with the Federal income tax law definition of life insurance we will apply to the Policy. These tests are the Cash Value Accumulation Test and the Guideline Premium/Cash Value Corridor Test. If the Guideline Premium/Cash Value Corridor Test is chosen, premium amounts will be limited based on the death benefit of the Policy. See Life Insurance Definition, page 47. We will not allocate funds to the Policy until we receive at least one quarter of the Minimum Annual Premium, and we have approved the Policy for issue. Thereafter, the timing and amount of premium payments may vary, within specified limits. A higher premium level may be required to keep the Guaranteed Minimum Death Benefit in force. After certain deductions have been made, Net Premiums may be allocated to one or more of the Divisions of the Variable Account and to the Guaranteed Interest Division. A Policy may be returned according to the terms of the Right to Examine Policy Period (also called the Free Look Period), during which time Net Premiums allocated to the Variable Account will be held in the Division investing in the Fidelity VIP Money Market Portfolio of the Variable Account. The assets of the Divisions of the Variable Account will be used to purchase, at net asset value, shares of designated Portfolios of various investment companies. The Policy Account Value is the sum of the amounts in the Divisions of the Variable Account plus the amount in the Guaranteed Interest Division and the amount in the Loan Division. The value of the amounts allocated to the Divisions of the Variable Account will vary with the investment experience of the corresponding Portfolios; there is no minimum guaranteed cash value for amounts allocated to the Divisions of the Variable Account. The value of amounts allocated to the Guaranteed Interest Division will depend on the interest rates we declare. The Account Value will also reflect deductions for the cost of insurance c. and expenses, as well as increases for additional Net Premiums. Replacing existing insurance coverage with the Policy described in this prospectus may not be advantageous. ISSUED BY: Security Life of Denver Insurance Company Security Life Center 1290 Broadway Denver, CO 80203-5699 (800) 525-9852 BROKER DEALER: ING America Equities, Inc. 1290 Broadway, Attn: Variable Denver, CO 80203-5699 (303) 860-2000 THROUGH ITS: Security Life Separate Account L1 ADMINISTERED AT: Customer Service Center P.O. Box 173763 Denver, CO 80217-3763 (800) 933-5858 PROSPECTUS DATED: May 1, 1997 ________________________________________________________________________________ 2 Strategic Advantage TABLE OF CONTENTS
DEFINITION OF SPECIAL TERMS USED IN THIS PROSPECTUS........................... 7 POLICY SUMMARY................................................................10 General Information...........................................................10 Death Benefits................................................................10 Benefits at Maturity..........................................................11 Additional Benefits...........................................................11 Premiums......................................................................11 Allocation of Net Premiums....................................................12 Policy Values.................................................................12 Determining the Value in the Divisions of the Variable Account................12 How We Calculate Accumulation Unit Values for Each Division...................12 Transfers of Account Values...................................................13 Dollar Cost Averaging.........................................................13 Automatic Rebalancing.........................................................13 Loans.........................................................................13 Partial Withdrawals...........................................................14 Surrender.....................................................................14 Right to Exchange Policy......................................................14 Lapse.........................................................................14 Reinstatement.................................................................14 Charges and Deductions........................................................14 Persistency Refund............................................................15 Refund of Sales Charges.......................................................15 Tax Considerations............................................................17 INFORMATION ABOUT SECURITY LIFE, THE VARIABLE ACCOUNT, THE INVESTMENT OPTIONS AND THE GUARANTEED INTEREST DIVISION..........................................18 Security Life of Denver Insurance Company.....................................18 Security Life Separate Account L1.............................................18 Investment Objectives of the Portfolios.......................................19 The Guaranteed Interest Division..............................................23 DETAILED INFORMATION ABOUT THE STRATEGIC ADVANTAGE VARIABLE UNIVERSAL LIFE POLICY................................................23 Applying for a Policy.........................................................23 Premiums......................................................................24 Scheduled Premiums.......................................................24 Unscheduled Premium Payments.............................................24 Minimum Annual Premium...................................................24 Premium Payments Affect The Continuation of Coverage.....................25 Choice of Definitional Tests.............................................25 Choice of Guaranteed Minimum Death Benefit Provisions....................25 Modified Endowment Contracts.............................................25 Allocation of Net Premiums....................................................25 Death Benefits................................................................26 Death Benefit Options....................................................26 Changes In Death Benefit Option..........................................26 Guaranteed Minimum Death Benefit Provision...............................27 Requirements to Maintain the Guarantee Period............................28
________________________________________________________________________________ 3 Strategic Advantage Changes In Death Benefit Amounts........................................28 Benefits at Maturity.........................................................29 Additional Benefits..........................................................29 Accidental Death Benefit Rider..........................................29 Adjustable Term Insurance Rider.........................................30 Additional Insured Rider................................................30 Guaranteed Insurability Rider...........................................30 Right to Exchange Rider.................................................30 Waiver of Cost of Insurance Rider.......................................30 Waiver of Specified Premium Rider.......................................31 Policy Values................................................................31 Account Value...........................................................31 Cash Surrender Value....................................................31 Net Cash Surrender Value................................................31 Net Account Value.......................................................31 Determining the Value of Amounts in the Divisions of the Variable Account....31 How We Calculate Accumulation Unit Values for Each Division..................31 Transfers of Account Values..................................................32 Dollar Cost Averaging........................................................33 Automatic Rebalancing........................................................33 Policy Loans.................................................................34 Partial Withdrawals........................................................ 35 Surrender.................................................................. 36 Right to Exchange Policy................................................... 36 Lapse...................................................................... 36 If Guaranteed Minimum Death Benefit Provision Is Not in Effect........ 36 If the Guaranteed Minimum Death Benefit Provision Is in Effect........ 37 Grace Period............................................................... 37 Reinstatement.............................................................. 37 CHARGES, DEDUCTIONS AND REFUNDS............................................ 37 Deductions from Premiums................................................... 37 Tax Charges........................................................... 37 Sales Charges......................................................... 38 Daily Deductions from the Variable Account................................. 38 Mortality and Expense Risk Charge..................................... 38 Monthly Deductions from the Account Value.................................. 38 Initial Policy Charge................................................. 38 Monthly Administrative Charge......................................... 39 Cost Of Insurance Charges............................................. 39 Charges For Additional Benefits....................................... 39 Guaranteed Minimum Death Benefit Charge............................... 40 Changes In Monthly Charges............................................ 40 Policy Transaction Fees.................................................... 40 Partial Withdrawal.................................................... 40 Transfers............................................................. 40 Premium Allocation Charges............................................ 40 Illustrations......................................................... 40 Persistency Refund......................................................... 40 Refund of Sales Charges.................................................... 42 Charges from Portfolios.................................................... 42 Group or Sponsored Arrangements............................................ 46 Other Charges.............................................................. 46
________________________________________________________________________________ 4 Strategic Advantage TAX CONSIDERATIONS.......................................................... 47 Life Insurance Definition................................................... 47 Diversification Requirements................................................ 47 Modified Endowment Contracts................................................ 48 Tax Treatment of Premiums................................................... 48 Loans, Lapses, Surrenders and Withdrawals................................... 48 If the Policy is Not a Modified Endowment Contract..................... 48 If the Policy is a Modified Endowment Contract......................... 49 Alternative Minimum Tax..................................................... 49 Section 1035 Exchanges...................................................... 49 Tax-exempt Policy Owners.................................................... 50 Changes to Comply with Law.................................................. 50 Other....................................................................... 50 ADDITIONAL INFORMATION ABOUT THE POLICY..................................... 50 Voting Privileges........................................................... 50 Right to Change Operations.................................................. 51 Reports to Owners........................................................... 52 OTHER GENERAL POLICY PROVISIONS............................................. 52 Free Look Period............................................................ 52 The Policy.................................................................. 52 Age......................................................................... 53 Ownership................................................................... 53 Beneficiary................................................................. 53 Collateral Assignment....................................................... 53 Incontestability............................................................ 53 Misstatements of Age or Sex................................................. 53 Suicide..................................................................... 53 Payment..................................................................... 54 Notification and Claims Procedures.......................................... 54 Telephone Privileges........................................................ 54 Non-Participating........................................................... 54 Distribution of the Policies................................................ 54 Settlement Provisions....................................................... 55 ILLUSTRATIONS OF DEATH BENEFITS, ACCOUNT VALUES AND SURRENDER VALUES, AND ACCUMULATED PREMIUMS........................................................ 57 ADDITIONAL INFORMATION...................................................... 70 Directors and Officers...................................................... 70 State Regulation............................................................ 77 Legal Matters............................................................... 77 Legal Proceedings........................................................... 77 Experts..................................................................... 77 Registration Statement...................................................... 77 FINANCIAL STATEMENTS........................................................ 78 APPENDIX A..................................................................166 APPENDIX B..................................................................174 APPENDIX C..................................................................175 Performance Information.....................................................175
________________________________________________________________________________ 5 Strategic Advantage IN THIS PROSPECTUS "WE," "US" AND "OUR" REFER TO SECURITY LIFE OF DENVER INSURANCE COMPANY. THIS POLICY IS NOT AVAILABLE IN ALL JURISDICTIONS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING IN ANY JURISDICTION IN WHICH SUCH OFFERING MAY NOT BE LAWFULLY MADE. NO PERSON IS AUTHORIZED TO MAKE ANY REPRESENTATION REGARDING THE OFFERING DESCRIBED IN THIS PROSPECTUS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS OR ANY ATTACHED SUPPLEMENT HERETO. ________________________________________________________________________________ 6 Strategic Advantage DEFINITION OF SPECIAL TERMS USED IN THIS PROSPECTUS AS USED IN THIS PROSPECTUS, THE FOLLOWING TERMS HAVE THE INDICATED MEANINGS. THERE ARE OTHER CAPITALIZED TERMS WHICH ARE EXPLAINED OR DEFINED IN OTHER PARTS OF THIS PROSPECTUS. ACCOUNT VALUE -- The sum of the amounts allocated to the Divisions of the Variable Account and to the Guaranteed Interest Division, as well as any amount set aside in the Loan Division to secure a Policy Loan. ACCUMULATION UNIT -- A unit of measurement which we use to calculate the Account Value in each Division of the Variable Account. ACCUMULATION UNIT VALUE -- The value of the Accumulation Units of each Division of the Variable Account. The Accumulation Unit Value is determined as of each Valuation Date. ADJUSTABLE TERM INSURANCE RIDER -- The Adjustable Term Insurance Rider is available to add death benefit coverage to the Policy. The Adjustable Term Insurance Rider allows the Owner to schedule the pattern of death benefits appropriate for future needs. The Adjustable Term Insurance Rider is not guaranteed under the Guaranteed Minimum Death Benefit provision. AGE -- The Insured's Age at any time is his or her age on the birthday nearest the Policy Date increased by the number of full Policy years elapsed since the Policy Date. BASE DEATH BENEFIT -- The Base Death Benefit will vary according to which death benefit option is chosen: Under Option 1, the Base Death Benefit equals the Stated Death Benefit of the Policy. Under Option 2, the Base Death Benefit equals the Stated Death Benefit of the Policy plus the Account Value. Under Option 2, the Base Death Benefit fluctuates with the amount of the Account Value, but will never be less than the Stated Death Benefit. Under Option 3, the Base Death Benefit equals the Stated Death Benefit of the Policy plus the sum of all premiums paid minus Partial Withdrawals taken under the Policy. Under Option 3, the Base Death Benefit generally will increase as premiums are paid and decrease as Partial Withdrawals are taken. In no event will the Base Death Benefit be less than the Stated Death Benefit. The Base Death Benefit may be increased from the amount described to comply with the Federal income tax law definition of life insurance, regardless of death benefit option selected. BENEFICIARY(IES) -- The person or persons designated to receive the Death Proceeds in the case of the death of the Insured. CASH SURRENDER VALUE -- The amount of the Account Value plus any refund of sales charges due. CUSTOMER SERVICE CENTER -- Our administrative office at P.O. Box 173763, Denver, CO 80217-3763. DEATH PROCEEDS -- The amount payable on the death of the Insured. It equals the Base Death Benefit plus any Rider, if applicable, reduced by any outstanding Policy Loan and accrued loan interest. If death occurs after the Policy has entered the grace period, Death Proceeds will be further reduced by any Policy charges incurred but not yet deducted. DIVISION(S) -- The investment options available: The Divisions of the Variable Account, each of which invests in shares of one of the Portfolios; the Guaranteed Interest Division; and the Loan Division. FREE LOOK PERIOD -- The period of time within which the Owner may examine the Policy and return it for a refund. This is also called the Right to Examine Policy Period. GENERAL ACCOUNT -- The account which contains all of our assets other than those held in the Variable Account or our other separate accounts. GUARANTEED INTEREST DIVISION -- Part of our General Account to which a portion of the Account Value may be allocated and which provides guarantees of principal and interest. See The Guaranteed Interest Division, page 23. GUARANTEED MINIMUM DEATH BENEFIT -- The provision in the Policy which guarantees that the Stated Death Benefit will remain in force for the Guarantee Period regardless of the amount of the Net Account Value, provided certain conditions are met. See Guaranteed Minimum Death Benefit, page 27. GUARANTEE PERIOD -- The period during which the Stated Death Benefit is guaranteed under the Guaranteed ________________________________________________________________________________ 7 Strategic Advantage SCHEDULED PREMIUM -- The premium amount specified by the Owner on the application as the amount which is intended to be paid at fixed intervals over a specified period of time. Premiums can be paid on a quarterly, semiannual, or annual basis, as specified; the Scheduled Premium need not be paid, and it may be changed at any time. Also, within limits, the Owner may pay less or more than the Scheduled Premium. See Schedule Premiums, page 24. SEC -- The United States Securities and Exchange Commission. STATED DEATH BENEFIT -- The initial amount of Base Death Benefit under the Policy. The Stated Death Benefit amount will not vary unless changed by the Owner or as a result of a transaction, e.g., a partial withdrawal. TARGET DEATH BENEFIT -- When Adjustable Term Insurance Rider is added to the Policy, the Owner specifies the Target Death Benefit and Stated Death Benefit in the application for the Policy; the Adjustable Term Insurance Rider Death Benefit is the difference between the Target Death Benefit and the Base Death Benefit provided by the Policy. In no event will the Adjustable Term Insurance Rider Death Benefit be less than zero. The Adjustable Term Insurance Rider automatically adjusts over time for changes in the Base Death Benefit due to the Federal income tax law definition of life insurance to keep the Target Death Benefit at the desired amount. The Target Death Benefit for each year will be shown in the Schedule when an Adjustable Term Insurance Rider exists on the Policy. TARGET PREMIUM -- The premium on which the sales charge is calculated. See Sales Charges, page 38. TRANSACTION DATE -- The date we receive a premium or an acceptable written or telephone request at our Customer Service Center. If a premium or request reaches our Customer Service Center on a day which is not a Valuation Date, or after the close of business on a Valuation Date (that is, after 4:00 p.m. Eastern Time), the Transaction Date will be the next succeeding Valuation Date. VALUATION DATE -- Each date as of which the net asset value of the shares of the Portfolios and unit values of the Divisions are determined. Valuation Dates currently occur on each day on which the New York Stock Exchange and Security Life's Customer Service Center are open for business, except for days that a Division's corresponding Portfolio does not value its shares. VALUATION PERIOD -- The period which begins at 4:00 p.m. Eastern Time on a Valuation Date and ends at 4:00 p.m. Eastern Time on the next succeeding Valuation Date. VARIABLE ACCOUNT -- Security Life Separate Account L1 established by Security Life to segregate the assets funding the Policy from the assets in our General Account. The Variable Account is divided into Divisions, each of which invests in shares of one of the Portfolios. ________________________________________________________________________________ 8 Strategic Advantage POLICY SUMMARY THE PURPOSE OF THIS POLICY SUMMARY IS TO PROVIDE A BRIEF OVERVIEW OF THE POLICY. FURTHER DETAIL IS PROVIDED IN THE POLICY AND IN THE DETAILED INFORMATION APPEARING ELSEWHERE IN THIS PROSPECTUS. THE DISCUSSION IN THIS PROSPECTUS ASSUMES THAT ANY STATE VARIATION WILL BE COVERED IN A SPECIAL PROSPECTUS SUPPLEMENT OR IN THE FORM OF POLICY APPROVED IN THAT STATE, AS APPROPRIATE. THE TERMS UNDER WHICH THE POLICIES ARE ISSUED MAY ALSO VARY FROM THOSE DESCRIBED IN THIS PROSPECTUS BASED ON PARTICULAR CIRCUMSTANCES. THE DESCRIPTION OF THE POLICIES IN THIS PROSPECTUS IS SUBJECT TO THE TERMS OF THE POLICY PURCHASED BY AN OWNER OR ANY RIDER TO IT. AN APPLICANT MAY REVIEW A COPY OF THE POLICY AND ANY RIDER TO IT ON REQUEST. GENERAL INFORMATION The Policy provides life insurance protection on the life of the Insured. So long as the Policy remains in force, we will pay a death benefit when the Insured dies. We will pay a maturity benefit in lieu of a death benefit when the Policy reaches the Maturity Date during the lifetime of the Insured. Strategic Advantage is designed primarily for use on a multi-life basis where the Insureds share a common employment or business relationship. The Policy may be owned individually or by a corporation, trust, association or similar entity. The Policy may be used for such purposes as informally funding non-qualified executive deferred compensation or salary continuation plans, retiree medical benefits, or other purposes. DEATH BENEFITS We will pay the Death Proceeds to the Beneficiary upon the death of the Insured while the Policy remains in force. The Death Proceeds will be equal to the Base Death Benefit plus any amounts payable from any additional benefits provided by Rider, reduced by the amount of any outstanding Policy Loan and any accrued loan interest. See Death Benefit, page ___________________________. If the Policy is in the grace period, the Death Proceeds will be paid but will be further reduced by any Policy charges incurred but not deducted. The Death Proceeds may be paid in one sum or under a variety of settlement options. See Settlement Provisions, page 55. When we issue the Policy, the death benefit is equal to the Base Death Benefit applied for plus any amount added by Adjustable Term Insurance Rider. The minimum Stated Death Benefit for which we will issue a Policy is $50,000; however, we may lower the minimum Stated Death Benefit for certain group or sponsored arrangements. The Base Death Benefit may vary from the Stated Death Benefit as a result of choice of death benefit option, increases to keep the Base Death Benefit in compliance with the Federal income tax law definition of life insurance, changes in the death benefit option, or increases and decreases requested by the Owner. The Owner may choose from three death benefit options, which may affect the amount of the Base Death Benefit. See Death Benefit Options, page ______ ____________________. The total Stated Death Benefit is the sum of the Stated Death Benefits for all coverage segments. The three death benefit options are: Option 1: The Base Death Benefit equals the total Stated Death Benefit. Option 2: The Base Death Benefit equals the total Stated Death Benefit plus the Account Value. Under this option, the Base Death Benefit fluctuates daily with the amount of the Account Value, but will never be less than the Stated Death Benefit. Option 3: The Base Death Benefit equals the total Stated Death Benefit plus the sum of premiums paid minus Partial Withdrawals taken. In no event will the Base Death Benefit be less than the Stated Death Benefit. The Owner may request a change to the death benefit option on any Policy anniversary. We may require evidence of insurability according to our normal rules of underwriting for this type of Policy for a change in death benefit option. See Changes in Death Benefit Option, page ________________________. The Adjustable Term Insurance Rider is available to provide term insurance coverage which adjusts automatically over time to fill the difference between the Target Death Benefit chosen and the Base Death Benefit (which may change as often as daily). The Adjustable Term Insurance Rider has no externally defined premium; instead, a cost of insurance charge is deducted monthly from the Account Value for the Adjustable Term ________________________________________________________________________________ Strategic Advantage 9 Insurance Rider amount in effect. See Adjustable Term Insurance Rider, page ___________________________. Generally, the Policy will remain in force only as long as the Net Account Value is sufficient to pay all the monthly deductions. However, if the special continuation period is in effect (during the first three policy years) and minimum premiums have been paid as specified in the section on Lapse (see Lapse, page 36) then the Policy and all Riders are guaranteed not to lapse, regardless of the amount of the Net Account Value. See Guaranteed Minimum Death Benefit Provision, page 27. The Stated Death Benefit of the Policy may also remain in force after the first three policy years (special continuation period) even if the Net Account Value is insufficient to pay all the monthly deductions if the Guaranteed Minimum Death Benefit provision is in effect and the requirements have been met. See Guaranteed Minimum Death Benefit Provision, page 27. At least 30 days prior to a Policy anniversary, the Owner may request that the insurance coverage be increased or decreased. Increases in the death benefit are not allowed after the Insured's Age 85. The death benefit may be changed only once each Policy year on the Policy anniversary. The change in coverage may not be for an amount less than $1,000. We may require evidence of insurability according to our normal rules of underwriting for this type of Policy for an increase to the Stated or Target Death Benefit. The Stated Death Benefit may be decreased if the effective date of the decrease will occur after the later of two years from the Policy Date or two years after the prior increase is made. Decreases in the death benefit may not decrease the Stated Death Benefit below the minimum we require to issue this Policy. Unless otherwise indicated, any request for an increase to the Target Death Benefit will be assumed to also be a request for an increase to the Stated Death Benefit so that the amount of the Adjustable Term Insurance Rider at the time of the increase will not change. In some cases, we may not approve a change if it would disqualify the Policy as life insurance under applicable Federal income tax law. See Life Insurance Definition, page 47, and Changes In Death Benefit Option, page 26. BENEFITS AT MATURITY If the Insured is still living on the Maturity Date, we will pay the Net Account Value. The Policy will then end. See Benefits at Maturity, page 29. ADDITIONAL BENEFITS Additional benefits may be included with the Policy, and are attached to the Policy by Rider. The charge for these additional benefits is deducted monthly from the Account Value. We offer a variety of additional benefits. See Additional Benefits, page 29. PREMIUMS The Policy is a flexible premium Policy, so the amount and frequency of premium payments may vary, within limits. Other than the Minimum Annual Premium, 25% of which must be paid in order for coverage to begin, and any payments required to keep the Policy in force, there are no required premium payments. The Scheduled Premium is selected by the Owner, within our limits, when application for the Policy is made. The Scheduled Premium may not necessarily be sufficient to maintain the Guarantee Period for one of the Guaranteed Minimum Death Benefit provisions or keep the Policy in force. Premium reminder notices for the Scheduled Premiums will be sent on an annual, semi-annual, or quarterly basis. Monthly payments may be made by Electronic Funds Transfer from a checking account. The financial institution making the Electronic Funds Transfers may impose a charge for this service. See Premiums, page 24. When applying for the Policy, the Owner will irrevocably choose which of two tests for compliance with the Federal income tax law definition of life insurance we will apply to the Policy. These tests are the Cash Value Accumulation Test and the Guideline Premium/Cash Value Corridor Test. These tests may limit the amount of premiums that may be paid. See Choice of Definitional Test, page 25, and Life Insurance Definition, page 47. The Owner may also choose to purchase one of two Guaranteed Minimum Death Benefit provisions. These provide a guarantee after the first three policy years (special continuation period) that the Stated Death Benefit will remain in force for the Guarantee Period regardless of the amount of the Policy's Net Account Value. The provision allows a choice of the Guarantee Period: a) ten-year or to the Insured's Age 65, whichever is later, or b) lifetime. Premium levels higher than the Minimum Annual Premium will be required if one of the ________________________________________________________________________________ 10 Strategic Advantage Guaranteed Minimum Death Benefit provisions is chosen. An extra charge will be deducted from the Account Value each month the Guaranteed Minimum Death Benefit is in effect. In addition on all Monthly Processing Dates during the Guarantee Period, the Net Account Value must remain diversified according to our requirements. The Guaranteed Minimum Death Benefit provisions may not be available in all states. See Changes In Death Benefit Option, page 26. We will notify the Policy Owner if the Scheduled Premium would cause the Policy to immediately be a Modified Endowment Contract under Federal income tax law. See Modified Endowment Contracts, page 25. Generally, unscheduled premium payments may be made at any time so long as each payment is at least $100. We reserve the right to limit unscheduled premiums if the payment would result in an increase in the amount of Base Death Benefit required by the Federal income tax law definition of life insurance. If a Policy Loan is outstanding, any payment which is not a Scheduled Premium payment received before the Maturity Date is considered a loan repayment, unless otherwise indicated. See Unschedule Premium Payments, page 24. Since this is a flexible premium life insurance Policy, the amount of premiums paid will affect the length of time the Policy will stay in force. See Premium Payments Affect The Continuation of Coverage, page 25. ALLOCATION OF NET PREMIUMS After certain premium-based charges are deducted from each premium, the balance, called the Net Premium, is added to the Account Value based on the premium allocation instructions. Net Premiums may be allocated to one or more of the Divisions of the Variable Account, or to the Guaranteed Interest Division, or both. Amounts allocated to the Divisions of the Variable Account will be held in the Division investing in the Fidelity VIP Money Market Portfolio until the end of the Free Look Period. At the end of the Free Look Period, this portion of the Account Value will be reallocated according to the most recent premium allocation instructions. Net Premiums received after the Free Look Period will be allocated upon receipt according to the most recent written premium allocation instructions. Allocation percentages must be in whole numbers, with the sum equaling 100%. See Allocation of Net Premiums, page 25. POLICY VALUES The Policy Account Value is equal to the sum of the amounts in the Guaranteed Interest Division and in the Divisions of the Variable Account. It also includes any amount we set aside in the Loan Division as collateral for any outstanding Policy Loan. The Account Value reflects Net Premiums paid, as well as deductions for charges. It will also reflect the investment experience of amounts allocated to the Divisions of the Variable Account, and interest earned on amounts allocated to the Guaranteed Interest Division and the Loan Division. Any Partial Withdrawal, and any service fee, will be deducted from the Account Value. The Cash Surrender Value of the Policy is equal to the Account Value plus any refund of sales charges due. The Net Cash Surrender Value of the Policy is equal to the Cash Surrender Value less the amount of any outstanding Policy Loan and accrued loan interest. The Net Account Value of the Policy is equal to the Account Value less the amount of any outstanding Policy Loan and accrued loan interest. DETERMINING THE VALUE IN THE DIVISIONS OF THE VARIABLE ACCOUNT The amounts included in the Divisions of the Variable Account are measured in terms of Accumulation Units and Accumulation Unit Values. On any given day, the value of the amount in a Division of the Variable Account is equal to the Accumulation Unit Value times the number of Accumulation Units credited in that Division. The Accumulation Units of each Division of the Variable Account will have different Accumulation Unit Values. See Determining the Value of Amounts in the Divisions of the Variable Account, page 31. HOW WE CALCULATE ACCUMULATION UNIT VALUES FOR EACH DIVISION We determine Accumulation Unit Values for each Division of the Variable Account as of each Valuation Date. All Policy transactions are effective as of a Valuation Date. The Accumulation Unit Value of each Division reflects the investment experience of the underlying Portfolio for the Valuation Period as well as asset based charges deducted in connection with the Policy and the expenses of the Portfolio. See How We Calculate Accumulation Unit Values for Each Division. page 31. ________________________________________________________________________________ 11 Strategic Advantage TRANSFERS OF ACCOUNT VALUES After the Free Look Period, up to 12 transfers among Divisions of the Variable Account or to the Guaranteed Interest Division may be made in each Policy year without charge. There will be a $25 charge for each transfer over 12 in a Policy year. Transfers due to the operation of Automatic Rebalancing or Dollar Cost Averaging are not included in determining the limit on transfers without a charge. The minimum amount we will transfer is $100. Once during the first 30 days of each Policy year, transfers may be made from the Guaranteed Interest Division. Transfer requests received within 30 days prior to the Policy anniversary will be deemed to occur as of the Policy anniversary. Transfer requests received on the Policy anniversary or within the following 30 days will be processed. Transfer requests received at any other time will not be processed. Transfers of the Account Value to the Guaranteed Interest Division are not limited to this 30-day period. Transfer amounts from the Guaranteed Interest Division to the Divisions of the Variable Account are limited to the greatest of (i) 25% of the balance in the Guaranteed Interest Division at the time of the first transfer or withdrawal in a Policy year, (ii) the sum of any amounts transferred and withdrawn from the Guaranteed Interest Division in the prior Policy year, or, (iii) $100. See Transfers of Account Values, page 32. DOLLAR COST AVERAGING Dollar Cost Averaging is available by electing this feature on the application, by completing the appropriate form or by telephone, if the proper telephone authorization form is on file with us. We offer Dollar Cost Averaging to Owners who have at least $10,000 either in the Division investing in the Fidelity VIP Money Market Portfolio or the Division investing in the Neuberger & Berman AMT Limited Maturity Bond Portfolio of the Variable Account. With Dollar Cost Averaging, a designated dollar amount of Account Value in the selected Division will be transferred automatically as of each Monthly Processing Date to one or more other Divisions of the Variable Account. The monthly transfer under Dollar Cost Averaging may be no less than $100 per month. Dollar Cost Averaging may also be used to meet the diversification requirements of the Guaranteed Minimum Death Benefit provisions. There is no charge for this feature. If both Dollar Cost Averaging and Automatic Rebalancing are elected, Dollar Cost Averaging will occur first. As of the first Valuation Date of the next calendar quarter after Dollar Cost Averaging has terminated, Automatic Rebalancing will begin. When dollar cost averging terminates you will need to change your premium allocation to your desired Automatic Rebalancing allocation. See Dollar Cost Averaging, page 33. AUTOMATIC REBALANCING Automatic Rebalancing is available by electing this feature on the application, by completing the appropriate form or by telephoning us, if the proper telephone authorization form is on file with us. Automatic Rebalancing allows the Owner to match Account Value allocations over time to the premium allocation percentages. As of the first Valuation Date of each calendar quarter, we will automatically rebalance the amounts in the Divisions to match the current premium allocation percentages according to the most recent instructions. This will rebalance the Account Values that may be out of line with those allocation percentages, which may result, for example, from Divisions which underperform other Divisions in certain quarters. With Automatic Rebalancing, Account Values may be reallocated among any number of Divisions, and those allocations may, within certain limits, be changed at any time. Automatic Rebalancing may also be used to simplify the process of meeting the diversification requirements of the Guaranteed Minimum Death Benefit provisions. Any transfers as a result of the operation of the Automatic Rebalancing feature are not counted toward the limit of 12 transfers than can be made each Policy year without a transfer charge. However, we will charge a fee of $25 each time premium allocation is changed more often than five times per Policy year; otherwise, there is no charge for this feature. If both Dollar Cost Averaging and Automatic Rebalancing are elected, Dollar Cost Averaging will occur first. As of the first Valuation Date of the next calendar quarter after Dollar Cost Averaging has terminated, Automatic Rebalancing will begin. See Automatic rebalancing, page 33. LOANS Loans may be taken against the Policy's Account Value as of the Valuation Date the loan request is processed. Unless otherwise required by state law, the loan must be at least $100. Loan interest accrues at an annualized rate of 3.75%. An amount equal to the Policy Loan is ________________________________________________________________________________ 12 Strategic Advantage withdrawn from the Divisions of the Variable Account and from the Guaranteed Interest Division and is placed in our General Account as collateral for the loan. We call this segregated amount the Loan Division. The Loan Division earns a guaranteed rate of interest equal to 3% on an annualized basis. Unless otherwise indicated, we will assume that any payments, other than Scheduled Premiums, constitute Policy Loan repayments and not premiums. See Policy Loans, page 34. PARTIAL WITHDRAWALS A Partial Withdrawal of a portion of the Net Account Value may be requested any time after the first Policy year, within limits. One Partial Withdrawal is allowed each Policy year. The minimum Partial Withdrawal is $100; the maximum Partial Withdrawal is the amount which will leave $500 as the Net Account Value. We will process only the amount of the Partial Withdrawal request which will leave $500 as the Net Account Value. If more than this maximum is requested, we will require a full surrender of the Policy. When a Partial Withdrawal is taken, the amount of the withdrawal plus a service fee is deducted from the Account Value. Depending on the amount of the withdrawal, the Death Proceeds payable under the Policy may also be reduced. No Partial Withdrawal will be allowed if the Stated Death Benefit remaining in force after the Partial Withdrawal would be less than the minimum we require to Issue this Policy at the time of the reduction. See Partial Withdrawals, page 35. SURRENDER The Policy may be surrendered for its Net Cash Surrender Value at any time while the Insured is living. The Net Cash Surrender Value of the Policy equals the Cash Surrender Value minus any Policy Loan and accrued loan interest. We will compute the Net Cash Surrender Value as of the Valuation Date we receive the request for surrender and the Policy at our Customer Service Center, and all insurance coverage will end on that date. See Surrender, page 36. RIGHT TO EXCHANGE POLICY At any time during the first 24 months following the Policy Date or a requested increase to the Stated Death Benefit, the Owner may exercise the right to exchange the Policy from one in which the Account Value is not guaranteed into a guaranteed Policy unless required differently by state law. This is accomplished by the transfer of the entire amount in the Divisions of the Variable Account to the Guaranteed Interest Division, the allocation of all future premium payments to the Guaranteed Interest Division and the removal of the right to allocate future amounts to the Variable Account. See Surrender, page 36. LAPSE Insurance coverage will continue as long as the Net Account Value of the Policy is sufficient to pay all the deductions that are taken out of the Account Value each month. In addition, during the first three Policy years (the special continuation period), if on each Monthly Processing Date the sum of the premiums paid, less the sum of Partial Withdrawals, any outstanding Policy Loan and accrued loan interest is greater than or equal to one twelfth of the Minimum Annual Premium times the number of completed Policy months, then the Policy and all attached Riders are guaranteed not to lapse, regardless of the amount of the Net Account Value. Also, if the Guaranteed Minimum Death Benefit provision has been elected and the Guarantee Period has not ended, the Stated Death Benefit will remain in effect after the first three policy years (special continuation period) regardless of the amount of the Net Account Value. Any Policy charges during the Guarantee Period which would reduce the Net Account Value below zero will be waived. The Guarantee Period will end if the Policy does not meet the monthly premium test or if on any Monthly Processing Date the Net Account Value is not diversified according to our requirements as explained under Guaranteed Minimum Death Benefit Provision, page ___________________________. See Lapse, page 36. REINSTATEMENT A lapsed Policy and its Riders may be reinstated within five years of its lapse if it has not been surrendered for its Net Cash Surrender Value. This will require new evidence of insurability and payment of certain reinstatement premiums. We will also reinstate any Policy Loan which existed when coverage ended, with accrued loan interest to the date of lapse. See Reinstatement, page _____. CHARGES AND DEDUCTIONS DEDUCTIONS FROM PREMIUMS: The following charges are deducted from each premium before it is applied to the Account Value: ________________________________________________________________________________ 13 Strategic Advantage (i) Tax Charges -- A charge currently equal to 2.5% of premiums is deducted for state and local premium taxes. A charge currently equal to 1.5% of each premium is deducted to cover our estimated cost of the Federal income tax treatment of deferred acquisition costs. We reserve the right to increase or decrease the premium expense charges for taxes due to any change in tax law. We further reserve the right to increase or decrease the premium expense charge for the Federal deferred acquisition cost due to any change in the cost to us. (ii) Sales Charge -- A charge equal to a percentage of each premium based on the amount of premium paid and the number of years since the Policy Date or the date of an increase in coverage is deducted to cover a portion of our expenses in issuing this Policy. For each of the first five Policy years, this charge is equal to 8% of premiums paid up to the Target Premium and 3% of premiums paid in excess of the Target Premium. In the sixth Policy year and thereafter, the sales charge is equal to 3% of all premiums paid. See Deductions from Premiums, page ___________________________. DEDUCTIONS FROM THE VARIABLE ACCOUNT: A mortality and expense risk charge is assessed against the Divisions of the Variable Account in the amount of 0.75% per annum (0.002055% per day). We assess the mortality and expense risk charge to compensate us for assuming mortality and expense risks under the Policies. See Daily Deductions from the Variable Account, page 38. MONTHLY DEDUCTIONS FROM THE ACCOUNT VALUE: The following charges are deducted from the Account Value at the beginning of each Policy month: (i) Initial Policy Charge -- $10 per month for the first five Policy years. (ii) Monthly Administrative Charge -- $5 per month plus $0.0125 per thousand of Stated Death Benefit (or Target Death Benefit if greater). The per thousand charge is limited to $15 per month. (iii) Cost of Insurance Charge -- A monthly charge based on the Net Amount at Risk on the life of the Insured. The amount of this charge differs for Base Death Benefit and Adjustable Term Insurance Rider, if any, as well as for multiple base coverage segments. (iv) Charges for Additional Benefits -- The cost of any additional benefits added by Rider, other than the Adjustable Term Insurance Rider. (v) Guaranteed Minimum Death Benefit Charge -- currently $0.005 per thousand of the Stated Death Benefit during the Guarantee Period. This charge is guaranteed to never be greater than $.01 per thousand of the Stated Death Benefit. See Monthly Deductions from the Account Value, page 38. Policy Transaction Fees: Policy Transaction Fees are deducted from the Divisions of the Variable Account and Guaranteed Interest Division in the same proportion that the Account Value in each Division bears to the Net Account Value immediately after the transaction for which the charge is made. See Policy Transaction Fees, page 40. Charges From Portfolios: Shares of the Portfolios are purchased at net asset value, which reflects investment management and other direct expenses that have already been deducted from the assets of the Portfolio. See Charges from Portfolios, page 42. PERSISTENCY REFUND The Account Value will be credited with a Persistency Refund each Monthly Processing Date after the 10th Policy anniversary. The refund is equivalent to 0.5% of the Account Value per year, adjusted for any coverage segment in force for fewer than 10 years. See Persistency Refund, page 40. REFUND OF SALES CHARGES If the Policy has not lapsed, we will, upon full surrender of the Policy within the first 2 Policy years, return a portion of the sales charges previously deducted from premiums paid. See, Refund of Sales Charges, page 41. ________________________________________________________________________________ 14 Strategic Advantage TAX CONSIDERATIONS Under current Federal income tax law, death benefits of life insurance policies generally are not subject to income tax. In order for this treatment of the death benefit to apply, the Policy must qualify as a life insurance contract. The tax code provides for two tests to qualify a Policy as a life insurance contract. The Owner irrevocably selects which of these tests we will apply to the Policy in the application. After the Policy Date, the Policy will reflect the test chosen. See Life Insurance Definition, page 47. Generally, under current Federal income tax law, Account Value earnings are not subject to income tax as long as they remain within the Policy. Loans, Partial Withdrawals, surrender, lapse or an exchange of Insured may result in recognition of ordinary income for tax purposes and may result in penalties if the Policy is considered a Modified Endowment Contract as explained in Modified Endowment Contracts, page 25. ________________________________________________________________________________ 15 Strategic Advantage INFORMATION ABOUT SECURITY LIFE, THE VARIABLE ACCOUNT, THE INVESTMENT OPTIONS AND THE GUARANTEED INTEREST DIVISION SECURITY LIFE OF DENVER INSURANCE COMPANY Security Life of Denver Insurance Company ("Security Life") is a stock life insurance company organized under the laws of the State of Colorado in 1929. Our headquarters are located at 1290 Broadway, Denver, Colorado 80203-5699. We are admitted to do business in the District of Columbia and all states except New York. As of the end of 1996, Security Life and its consolidated subsidiaries had over $139.9 billion of life insurance in force. Our total assets exceeded $7.1 billion and our shareholder's equity exceeded $778 million, on a generally accepted accounting principles basis as of December 31, 1996. We offer a complete line of life insurance and retirement products, including annuities, individual and group life, and pension products, and market life reinsurance. Security Life actively manages its General Account investment portfolio to meet both long-term and short-term contractual obligations. The General Account portfolio invests primarily in investment-grade bonds and low-risk policy loans. Security Life is a wholly owned indirect subsidiary of ING Groep, N.V. ("ING"), one of the world's three largest diversified financial services organizations. ING is headquartered in Amsterdam, Netherlands, and has consolidated assets exceeding $277.9 billion on a Dutch (modified U.S.) generally accepted accounting principles basis as of December 31, 1996. The principal underwriter and distributor for the Policies is ING America Equities, Inc. ("ING America Equities"), a wholly owned subsidiary of Security Life. ING America Equities is registered as a broker-dealer with the SEC and is a member of the NASD. The current address for ING America Equities is 1290 Broadway, Denver, Colorado, 80203-5699. SECURITY LIFE SEPARATE ACCOUNT L1 Security Life Separate Account L1 (the "Variable Account"), established on November 3, 1993 under the Insurance Law of the State of Colorado, is a unit investment trust registered with the SEC under the Investment Company Act of 1940. Such registration does not involve any supervision by the SEC of the management of the Variable Account or Security Life. The Variable Account is a separate investment account of Security Life used to support our variable life insurance policies and for other purposes as permitted by applicable laws and regulations. The assets of the Variable Account are kept separate from our General Account and any other separate accounts we may have. We may offer other variable life insurance contracts that will invest in the Variable Account which are not discussed in this prospectus. The Variable Account may also invest in other securities which are not available to the Policy described in this prospectus. We own all the assets in the Variable Account. Income and realized and unrealized gains or losses from assets in the Variable Account are credited to or charged against the Variable Account without regard to other income, gains or losses in our other investment accounts. That portion of the assets of the Variable Account which is equal to the reserves and other Policy liabilities with respect to the Variable Account is not chargeable with liabilities arising out of any other business we conduct. The Variable Account may, however, be subject to liabilities arising from Divisions of the Variable Account whose assets are attributable to other variable life policies offered by the Variable Account. If the assets exceed the required reserves and other policy liabilities, we may transfer the excess to our General Account. Before making any such transfer, Security Life will consider any possible adverse effect the transfer might have on the Variable Account. The Variable Account has several Divisions, each of which invests in shares of a corresponding Portfolio of a mutual fund. Therefore, the investment experience of a Policy depends on the experience of the Portfolios designated. These Portfolios are available only to serve as the underlying investment for variable annuity and variable life insurance contracts issued through separate accounts of Security Life as well as other life insurance companies and may be available to certain pension accounts. They are not available directly to individual investors. ________________________________________________________________________________ 16 Strategic Advantage Each of the Portfolios is a separate series of an open-end management investment company which receives investment advice from a registered investment adviser not otherwise affiliated with Security Life. The Neuberger & Berman Advisers Management Trust has organized its Portfolio to a master feeder structure. See the prospectus for the Neuberger & Berman Advisers Management Trust for more details. The Portfolios as well as their investment objectives are described below. Shares of these Portfolios are sold to separate accounts of insurance companies, which may or may not be affiliated with Security Life or each other, a practice known as "shared funding." They may also sell shares to separate accounts to serve as the underlying investment for both variable annuity contracts and variable life insurance policies, known as "mixed funding." As a result, there is a possibility that a material conflict may arise between the interests of Owners of Policies in which Account Values are allocated to the Variable Account and of owners of policies in which account values are allocated to one or more other separate accounts investing in any one of the Portfolios. Shares of these Portfolios may also be sold to certain qualified pension and retirement plans qualifying under Section 401 of the Code that include cash or deferred arrangements under Section 401(k) of the Code. As a result, there is a possibility that a material conflict may arise between the interests of owners generally, or certain classes of owners, and such retirement plans or participants in such retirement plans. In the event of a material conflict, Security Life will consider what action may be appropriate, including removing the Portfolio from the Variable Account. There are certain risks associated with mixed and shared funding and with the sale of shares to qualified pension and retirement plans, as disclosed in each Portfolio's prospectus. Unless restricted by a state, the Company reserves the right to limit the number of Variable Account Divisions in which an Owner may invest. The Divisions of the Variable Accounts investing in the Neuberger & Berman Advisers Management Trust Government Income Portfolio and the Van Eck Worldwide Balanced Fund will no longer accept new investments, including through transfers, automatic rebalancing or dollar cost averaging. Existing investments in these Funds will not need to be moved at this time, however, Security Life encourages investors in these Portfolios to consider making a voluntary exchange to another Division. Transfers of account values from the Government Income Portfolio Division or the Worldwide Balanced Fund Division to another Division of the Variable Account or to the Guaranteed Interest Division will not count against the 12 transfers permitted annually without charge under the Contract. INVESTMENT OBJECTIVES OF THE PORTFOLIOS Each Portfolio has a different investment objective that it tries to achieve by following its investment strategy. The objectives and policies of each Portfolio will affect its return and its risks. A summary of the investment objectives is contained in the description of each Portfolio below. More detailed information may be found in the current prospectus for each Portfolio. A prospectus for the Portfolios being considered must accompany this prospectus and should be read in conjunction with this prospectus. NEUBERGER & BERMAN ADVISERS MANAGEMENT TRUST The Neuberger & Berman Advisers Management Trust (the "Trust") is a registered, open-end management investment company organized as a Delaware business trust pursuant to a Trust Instrument dated May 23, 1994. The Trust is comprised of separate Portfolios, each of which invests all of its net investable assets in a corresponding series of Advisers Managers Trust ("Managers Trust"), a diversified, open-end management investment company organized as of May 24, 1994 as a New York common law trust. This master feeder structure is different from that of many other investment companies which directly acquire and manage their own portfolios of securities. Neuberger & Berman Management Incorporated acts as investment manager to Managers Trust and Neuberger & Berman, L.P. as sub-adviser. Limited Maturity Bond Portfolio --- seeks the highest current income consistent with low risk to principal and liquidity. As a secondary objective, it also seeks to enhance its total return. The Limited Maturity Bond Portfolio pursues its investment objectives by investing in a diversified portfolio of U.S. Government and Agency securities and investment grade debt securities issued by financial institutions, corporations and others. The Limited Maturity Bond Portfolio may invest up to 10% of its net assets, measured at the time of investment, in fixed income securities rated below investment grade or in comparable unrated securities. The Limited Maturity Bond Portfolio's dollar weighted average portfolio duration may range up to four years. Government Income Portfolio -- (no longer available for new investments) seeks a high level of current ________________________________________________________________________________ 17 Strategic Advantage income and total return, consistent with safety of principal. The Portfolio invests at least 65% of its total assets in U.S. Government and Agency securities with an emphasis on U.S. Government mortgage backed securities. In addition, the Portfolio invests at least 25% of its total assets in mortgage backed securities (including U.S. Government mortgage backed securities) and asset backed securities. The investment manager follows a flexible investment strategy depending on market conditions and interest rate trends. Growth Portfolio -- seeks capital appreciation without regard to income and invests in small, medium and large capitalization securities believed to have maximum potential for long-term capital appreciation. The portfolio utilizes a "growth at a reasonable price" strategy in selecting these securities. This investment program involves greater risks and share price volatility than programs that invest in more conservative securities. Partners Portfolio -- seeks capital growth through an investment approach that is designed to increase capital with reasonable risk. Its investment program seeks securities believed to be undervalued based on strong fundamentals such as low price to earnings ratio, consistent cash flow, and support from asset values. Up to 15% of the series' net assets, measured at the time of investment, may be invested in corporate debt securities rated below investment grade. The Alger American Fund The Alger American Fund is a registered investment company organized on April 6, 1988 as a multi-series Massachusetts business trust. The Fund's investment manager is Fred Alger Management, Inc., which has been in the business of providing investment advisory services since 1964. Alger American Small Capitalization Portfolio -- seeks to obtain long term capital appreciation. Except during temporary defensive periods, the Portfolio invests at least 65% of its total assets in equity securities of companies that, at the time of purchase of the securities, have total market capitalization within the range of companies included in the Russell 2000 Growth Index ("Russell Index") or the S&P SmallCap 600 Index ("S&P Index"), updated quarterly. Both indexes are broad indexes of small capitalization stocks. As of March 31, 1997, the range of market capitalization of the companies in the Russell Index was $10 million to $1.945 billion; the range of market capitalization of the companies in the S&P Index at that date was $32 million to $2.579billion. The combined range was $10 million to $ 2.579 billion. Alger American MidCap Growth Portfolio -- seeks long-term capital appreciation. Except during temporary defensive periods, the Portfolio invests at least 65% of its total assets in equity securities of companies that, at the time of purchase of the securities, have total market capitalization within the range of companies included in the S&P MidCap 400 Index, updated quarterly. The S&P MidCap 400 Index is designed to track the performance of medium capitalization companies. As of March 31, 1997, the range of market capitalization of these companies was $120 million to $7.193 billion. Alger American Growth Portfolio -- seeks to obtain long-term capital appreciation. The Portfolio will invest its assets primarily in companies whose securities are traded on domestic stock exchanges or in the over-the- counter market. Except during temporary defensive periods, the Portfolio will Invest at least 65% of its total assets in the securities of companies that, at the time of purchase of the securities, have a total market capitalization of $1 billion or greater. Alger American Leveraged AllCap Portfolio -- seeks long-term capital appreciation. The Portfolio may purchase put and call options and sell (write) covered call and put options on securities and ________________________________________________________________________________ 18 Strategic Advantage securities indexes to increase gain and to hedge against the risk of unfavorable price movements, and may enter into futures contracts on securities indexes and purchase and sell call and put options on these futures contracts. The Portfolio may also borrow money for the purchase of additional securities. The Portfolio may borrow only from banks and may not borrow in excess of one third of the market value of its assets, less liabilities other than such borrowing. Except during temporary defensive periods, the Portfolio will invest 85% of its net assets in equity securities of companies of any size. FIDELITY VARIABLE INSURANCE PRODUCTS FUND AND VARIABLE INSURANCE PRODUCTS FUND II Fidelity Variable Insurance Products Fund and Variable Insurance Products Fund II are open-end, diversified, management investment companies organized as Massachusetts business trusts on November 13, 1981 and March 21, 1988, respectively. The funds are managed by Fidelity Management & Research Company ("FMR") which handles the Funds' business affairs. FMR is the management arm of Fidelity Investments, which was established in 1946 and is now America's largest mutual fund manager. VIP Growth Portfolio -- seeks capital appreciation by investing in common stocks, although the Portfolio is not limited to any one type of security. VIP Overseas Portfolio -- seeks long term growth of capital primarily through investments in foreign securities. The Overseas Portfolio provides a means for investors to diversify their own portfolios by participating in companies and economies outside of the United States. VIP Money Market Portfolio -- seeks as high a level of current income as is consistent with preserving capital and providing liquidity. The Portfolio will invest only in high quality U.S. dollar-denominated money market securities of domestic and foreign issuers. VIP II Asset Manager Portfolio -- seeks high total return with reduced risk over the long-term by allocating its assets among domestic and foreign stocks, bonds, and short-term fixed-income instruments. VIP II Index 500 Portfolio -- seeks to provide investment results that correspond to the total return (i.e., the combination of capital changes and income) of common stocks publicly traded in the United States. In seeking this objective, the Portfolio attempts to duplicate the composition and total return of the Standard & Poor's Composite Index of 500 Stocks while keeping transaction costs and other expenses low. The Portfolio is designed as a long-term investment option. INVESCO VARIABLE INVESTMENT FUNDS, INC. INVESCO Variable Investment Funds, Inc. is a registered, open-end management investment company that was organized as a Maryland corporation on August 19, 1993, and is currently comprised of four diversified investment Portfolios, described below. INVESCO Funds Group, Inc., the Fund's investment adviser, is primarily responsible for providing the Portfolios with various administrative services and supervising the Fund's daily business affairs. Portfolio management is provided to each Portfolio by its sub-adviser. INVESCO Trust Company serves as sub-adviser to the Industrial Income, High Yield and Utilities Portfolios. INVESCO Capital Management, Inc. serves as sub-adviser to the Total Return Portfolio. INVESCO VIF Total Return Portfolio -- seeks a high total return on investment through capital appreciation and current income. The Total Return Portfolio seeks to achieve its investment objective by investing in a combination of equity securities (consisting of common stocks and, to a lesser degree, securities convertible into common stock) and fixed income securities. INVESCO VIF Industrial Income Portfolio -- seeks the best possible current income, while following sound investment practices. Capital growth potential is an additional consideration in the selection of portfolio securities. The Portfolio normally invests at least 65% of its total assets in dividend-paying common stocks. Up to 10% of the Portfolio's total assets may be invested in equity securities that do not pay regular dividends. The remaining assets are invested in other income-producing securities, such as corporate bonds. The Portfolio also has the flexibility to invest in other types of securities. ________________________________________________________________________________ 19 Strategic Advantage INVESCO VIF High Yield Portfolio -- seeks a high level of current income by investing substantially all of its assets in lower rated bonds and other debt securities and in preferred stock. Under normal circumstances, at least 65% of the Portfolio's total assets will be invested in debt securities having maturities at the time of issuance of at least three years. Potential capital appreciation is a factor in the selection of investments, but is secondary to the Portfolio's primary objective. This Portfolio may not be appropriate for all Owners due to the higher risk of lower rated bonds commonly known as "junk bonds." See the prospectus for the INVESCO VIF High Yield Portfolio for more information concerning these risks. INVESCO VIF Utilities Portfolio -- seeks capital appreciation and income through investments primarily in equity securities of companies principally engaged in the public utilities business. VAN ECK WORLDWIDE INSURANCE TRUST Van Eck Worldwide Insurance Trust is a open-end management investment company organized as a "business trust" under the laws of the Commonwealth of Massachusetts on January 7, 1987. Van Eck Associates Corporation serves as investment adviser and manager to the Worldwide Hard Assets Fund. Van Eck Worldwide Balanced Fund -- (no longer available for new investments) seeks long term capital appreciation together with current income by investing in stocks, bonds and money market instruments worldwide. On April 30, 1997, the Van Eck Gold and Natural Resources Fund was renamed the Worldwide Hard Assets Fund to reflect the Fund's new investment objective and concentration policy approved by shareholders on April 9, 1997. The Fund's new investment objective is described below. Van Eck Worldwide Hard Assets Fund -- seeks a long-term capital appreciation by investing globally, primarily in "Hard Asset Securities." Hard assets are tangible, finite assets, such as real estate, energy, timber, and industrial and precious metals. Income is a secondary consideration. THE GUARANTEED INTEREST DIVISION All or a portion of Net Premiums and transfers of Net Account Value may be made to the Guaranteed Interest Division, which is part of our General Account and which pays interest at a declared rate. The General Account supports our non- variable insurance and annuity obligations. Because of exemptive and exclusionary provisions, interests in the Guaranteed Interest Division have not been registered under the Securities Act of 1933, and neither the Guaranteed Interest Division nor the General Account has been registered as an investment company under the Investment Company Act of 1940. Accordingly, neither the General Account, the Guaranteed Interest Division nor any interests therein are generally subject to regulation under these Acts. As a result, the staff of the SEC has not reviewed the disclosures included in this prospectus which relate to the General Account and the Guaranteed Interest Division. These disclosures, however, may be subject to certain provisions of the Federal securities law relating to the accuracy and completeness of statements made in this prospectus. For more details regarding the General Account, see the Policy. The amount in the Guaranteed Interest Division at any time is the sum of all Net Premiums allocated to that Division, all transfers to the Guaranteed Interest Division and earned interest. This amount is reduced by amounts transferred out of or withdrawn from the Guaranteed Interest Division and deductions from your Account Value allocated to the Guaranteed Interest Division. Amounts may be accumulated in the Guaranteed Interest Division by (i) allocating Net Premiums, (ii) transferring amounts from the Divisions of the Variable Account, (iii) earning interest on amounts already in the Guaranteed Interest Division, and (iv) repaying a Policy Loan to release amounts from the Loan Division. We pay a declared interest rate on all amounts in the Guaranteed Interest Division. From time to time, we declare the rates that will apply to amounts in the Guaranteed Interest Division. These annual interest rates will never be less than the minimum guaranteed interest rate of 3% and will be in effect for at least 12 months. The interest is credited as of each Valuation Date to the amount in the Guaranteed Interest Division. This interest will be paid regardless of the actual investment experience of the General Account; we bear the full amount of the investment risk for the amount allocated to the Guaranteed Interest Division. DETAILED INFORMATION ABOUT THE STRATEGIC ADVANTAGE VARIABLE UNIVERSAL LIFE POLICY This prospectus describes our standard Strategic Advantage Variable Universal Life Policy. There may be differences in the Policy because of the requirements of the state where the Policy is issued; any such changes will be defined in the Policy. The illustrations beginning on page 50 are intended to provide an idea of how the key financial elements of Strategic Advantage work. The illustrations show Premiums, Account Values, Cash Surrender Values and Death Benefits. APPLYING FOR A POLICY A Strategic Advantage Policy may be purchased by submitting an application to us. On the Policy Date, the Insured must be no more than Age 85. Before issuing any Policy or applying Net Premium to the Variable Account or the Guaranteed Interest Division, we require satisfactory evidence of insurability, which may include a medical examination, completion of all underwriting requirements, and satisfaction of issue requirements. The Investment Date is the date all issue requirements are satisfied, we receive and apply the first premium payment, in an amount not less than 25% of the Minimum Annual Premium, and approve the policy for issue. The Policy is generally available with a minimum Stated Death Benefit of $50,000; however, we may reduce this amount for certain group or sponsored arrangements if the average Stated Death Benefit at issuance for the single group or sponsored arrangement is at least $50,000. The maximum Stated Death Benefit will be limited by our underwriting and reinsurance procedures in effect at the time of application. The Policy Date is the date upon which the Policy becomes effective. The Policy Date is the date used to determine Policy years and Policy months regardless of when the Policy is delivered. In the case of certain payroll deduction plans or other automatic investment plans, the Policy Date may be different from the date the first premium payment is received. If the Policy Date is prior to the Investment Date, we will charge monthly deductions from the Policy Date. If a premium payment in an amount not less than one-twelfth of the Minimum Annual Premium is received with ________________________________________________________________________________ 20 Strategic Advantage the application and there has been no material misrepresentation in the application, temporary insurance equal to the face amount applied for up to a maximum amount as described in the binding limited life insurance coverage form will be in force. Coverage will begin when the binding limited life insurance coverage form has been completed and signed, a premium has been accepted by us and Part I of the application has been completed. Binding limited life insurance coverage will end on the earliest of the date: (i) premiums are returned five days after notice of termination is mailed to the Owner's address on the application; (ii) coverage starts under the Policy resulting from the application; (iii) a policy resulting from the application is refused by us; or (iv) 90 days after the date the binding limited life insurance coverage form is signed. In no event will a death benefit be provided under the temporary insurance agreement if there was a material misrepresentation in the answers to the questions in the binding limited life insurance coverage form or any question or statement in the application, a proposed Insured dies by suicide or intentional self-inflected injury, or the premium check or authorized withdrawal is not honored. PREMIUMS The amount and frequency of premium payments are flexible, within the limits described below. SCHEDULED PREMIUMS Even though premium amounts are flexible, the Schedule pages of the Policy will show a "Scheduled Premium." The Scheduled Premium may be chosen by the Owner, within our limits, when application for the Policy is made. The Scheduled Premium is the amount which is to be paid over a specified period of time and may not necessarily be sufficient to keep the Policy in force. Premiums can be paid on a quarterly, semiannual, or annual basis. Alternatively, the premiums, other than the first, may be paid via Electronic Fund Transfer each month. The financial institution making the Electronic Funds Transfer may impose a charge for this service. The Owner is not required to pay the Scheduled Premium, and it may be changed at any time subject to the maximum and minimum limits we may set. If one of the Guaranteed Minimum Death Benefit provisions described below has been chosen, the Scheduled Premium should not be less than the amount required to maintain the guarantee. UNSCHEDULED PREMIUM PAYMENTS Generally, unscheduled premium payments may be made at any time as long as each payment is at least $100. Unless otherwise required by state law, we may change this minimum if we give 90 days written notice of the change. We reserve the right to limit the amount of unscheduled premiums if the payment would result in an increase in the amount of the Base Death Benefit required by the Federal income tax law definition of life insurance, or to require suitable evidence of the insurability of the Insured at the time of the unscheduled premium payment. Premiums may also be limited if the Guideline Premium/Cash Value Corridor Test is chosen to comply with the Federal income tax law definition of life insurance. We will return premium payments if we determine the payment would cause the Policy to immediately become a Modified Endowment Contract. After the Owner has signed a form acknowledging that the Owner understands the Policy will be a Modified Endowment Contract, we will apply future premium payments. See Modified Endowment Contracts, page 25 and Changes to Comply with Law, page 50. If a Policy Loan is outstanding, any payment which is not a Scheduled Premium payment received before the Maturity Date is considered a loan repayment, unless otherwise indicated. Applicable tax and sales charges are not deducted from a loan repayment but are deducted from any payment which constitutes a premium. MINIMUM ANNUAL PREMIUM At least 25% of the Minimum Annual Premium must be paid and received by our Customer Service Center before the insurance will go into effect. We determine the applicable Minimum Annual Premium based on the Age, sex and Premium Class of the Insured, the Stated Death Benefit of the Policy and any additional benefits selected. We may reduce the Minimum Annual Premium for certain group or sponsored arrangements. The Minimum Annual Premium for the Policy is shown in the Schedule pages of the Policy. If on each Monthly Processing Date during the first three Policy years, the sum of premiums paid, less the sum of Partial Withdrawals and Policy Loans taken including accrued loan interest, is greater than or equal to one twelfth of the Minimum Annual Premium times the number of completed Policy months, the Policy is guaranteed not to lapse, regardless of its Net Account Value. See Lapse, page 36. ________________________________________________________________________________ 21 Strategic Advantage PREMIUM PAYMENTS AFFECT THE CONTINUATION OF COVERAGE If premium payments are discontinued, either temporarily or permanently, the Policy will continue in effect until the Net Account Value can no longer cover the monthly deductions for the benefits selected and the Policy will lapse. See Lapse, page 36. If the Minimum Annual Premium requirements are satisfied, the Policy is guaranteed not to lapse during the first three Policy years, regardless of its Net Account Value. If one of the Guaranteed Minimum Death Benefit provisions has been purchased, the Stated Death Benefit portion of the Policy will remain in effect until the end of the Guarantee Period so long as the conditions of the guarantee are met. See Guaranteed Minimum Death Benefit, page 27. CHOICE OF DEFINITIONAL TESTS When application for the Policy is made, the Owner will irrevocably choose which of the two tests for compliance with the Federal income tax law definition of life insurance we will apply to the Policy. These tests are the Cash Value Accumulation Test and the Guideline Premium/Cash Value Corridor Test. See Life Insurance Definition, page 47. If the Guideline Premium/Cash Value Corridor Test is chosen, the premium payments that may be made relative to the death benefit of the Policy will be limited. CHOICE OF GUARANTEED MINIMUM DEATH BENEFIT PROVISIONS When applying for the Policy, the Owner will also have the opportunity to choose from one of two Guaranteed Minimum Death Benefit provisions, which may extend the period that the Stated Death Benefit of the Policy will remain in effect if the Divisions of the Variable Account suffer adverse investment experience. These provisions require premium payment levels which are higher than the Minimum Annual Premium and an extra charge will be deducted from the Account Value each month during the Guarantee Period. In addition, the Net Account Value of the Policy must remain diversified according to our requirements. See Guaranteed Minimum Death benefit, page 27. The required premium levels depend on which of the two Guarantee Periods is chosen, as well as the Stated Death Benefit of the Policy, the Insured's Age, sex, and Premium Class, the death benefit option chosen, and Rider coverage. For Policies with no other Rider coverage, the required premium level for the Lifetime Guarantee Period will be equal to the guideline annual premium determined in accordance with the Federal income tax law definition of life insurance; the required premium level for the Ten Year/Age 65 Guarantee Period will be less than the guideline annual premium. Adding additional benefits to the Policy will increase the required premium levels above those indicated above. Policy Owners should consider the Guaranteed Minimum Death Benefit provision when setting the Scheduled Premium. MODIFIED ENDOWMENT CONTRACTS Regardless of which test for compliance with the Federal income tax law definition of life insurance is chosen, Federal income tax law provides special rules for the income taxation of distributions from life insurance policies which are defined as "Modified Endowment Contracts." These rules apply to distributions such as Policy Loans, surrenders and Partial Withdrawals. The application of these rules depends upon whether premiums have been paid which exceed a defined "seven-pay" limit. See Modified Endowment Contracts, page 48. If we determine that the Scheduled Premium will cause the Policy to be a Modified Endowment Contract on the Policy Date, we will issue the Policy based on the Scheduled Premium selected, but we will require the Owner to sign a form acknowledging that the Policy is a Modified Endowment Contract. Alternatively, the Scheduled Premium may be reduced to a level which will not cause the Policy to become a Modified Endowment Contract, and we will issue the Policy based on the revised Scheduled Premium. ALLOCATION OF NET PREMIUMS After certain premium-based charges are deducted from each premium, the balance, called the Net Premium, is added to the Account Value based on the Owner's instructions. Net Premium amounts allocated to the Guaranteed Interest Division will be allocated to that Division upon receipt. During the Free Look Period, Net Premiums allocated to the Divisions of the Variable Account will be allocated to the Division investing in Fidelity VIP Money Market Portfolio of the Variable Account. At the end of the Free Look Period, this portion of the Account Value will be automatically allocated according to the most recent premium allocation instructions. See Free Look Period, page 52. Net Premiums received after the Free Look Period will be allocated upon receipt according to the allocation instructions stated in the application for the Policy or the most recent instructions. Allocation percentages must be ________________________________________________________________________________ 22 Strategic Advantage in whole numbers, with the sum for all Divisions equaling 100%. Premium allocation instructions may be changed up to five times per Policy year without charge. Premium allocation changes exceeding five in a Policy year will be subject to a $25 charge for each additional change. DEATH BENEFITS Strategic Advantage offers the flexibility to determine the amount of insurance coverage needed, both now and in the future. It does this by combining the long- term advantages of permanent life insurance coverage with the flexibility and short-term advantages of term life insurance. Both permanent and term life insurance are available in this single Policy, Strategic Advantage. When a Policy is issued, an initial amount of insurance coverage is determined according to the instructions included in the application. The death benefit initially consists of a Stated Death Benefit and, if desired, an additional amount of insurance coverage which is added by Adjustable Term Insurance Rider. The Stated Death Benefit is the long-term element of the Policy; the Adjustable Term Insurance Rider is the term insurance element of the Policy. As described below, the Base Death Benefit may vary from the Stated Death Benefit. This may result from choice of death benefit option, increases to comply with the Federal income tax law definition of life insurance, changes in the death benefit option, partial withdrawals, or requested increases and decreases. The Adjustable Term Insurance Rider provides term insurance coverage which adjusts automatically to fill the difference between the Target Death Benefit chosen and the Base Death Benefit. The Adjustable Term Insurance Rider does not have an externally defined premium; the cost is included in the monthly cost of insurance charges discussed below. See Adjustable Term Insurance Rider, page 29. So long as the Policy remains in force, we will pay an amount equal to the Death Proceeds to the Beneficiary of this Policy when the Insured dies. The Death Proceeds will consist of the Base Death Benefit, reduced by any outstanding Policy Loan and accrued loan interest (and, if in the grace period, further reduced by any overdue charges).The Death Proceeds will also include any amount provided by Rider on the primary Insured. DEATH BENEFIT OPTIONS The Owner may choose from three death benefit options: Option 1, Option 2 or Option 3. These options may result in a Base Death Benefit under the Policy which exceeds the Stated Death Benefit. The death benefit option may be changed on any Policy anniversary. See Changes In Death Benefit Option, page ______ ____________________. Under Option 1, the Base Death Benefit equals the Stated Death Benefit of the Policy. Under Option 2, the Base Death Benefit equals the Stated Death Benefit of the Policy plus the Account Value. Under Option 2, the Base Death Benefit fluctuates daily with the amount of the Account Value, but will never be less than the Stated Death Benefit. Under Option 3, the Base Death Benefit equals the Stated Death Benefit of the Policy plus the sum of all premiums paid minus Partial Withdrawals taken under the Policy. Therefore, the Base Death Benefit generally will increase as premiums are paid and decrease as Partial Withdrawals are taken. In no event will the Base Death Benefit be less than the Stated Death Benefit. Owners who prefer to have any favorable investment experience reflected in increased insurance coverage should choose Option 2. Owners who prefer to have insurance coverage that does not vary in amount, and lower cost of insurance charges, should choose Option 1. Owners who wish to have their coverage generally reflect their premium outlay should choose Option 3. Federal income tax law requires the death benefit to be at least as great as the Account Value times a factor which is defined in the law. The factors are determined based upon the Insured's Age and possibly Premium Class and sex at any point in time as well as the test for compliance selected in the original application for this Policy. See Life Insurance Definition, page 47, page for a description of the tests and these factors. We will adjust the Policy if necessary to continue to qualify as life insurance under the applicable provisions of the Federal income tax laws in existence at the time the Policy is issued. CHANGES IN DEATH BENEFIT OPTION A change in death benefit option may be requested at least 30 days prior to a Policy anniversary. The change will be effective as of the Policy anniversary. The death benefit option change applies to the entire Stated Death Benefit. For us to approve a change in the death benefit option from Option 1 to Option 2, or from Option 1 to Option 3, evidence that the Insured is insurable according to our normal rules of underwriting for that class of policy must be submitted to us. We may not allow a change that would reduce the Stated Death Benefit below ________________________________________________________________________________ 23 Strategic Advantage the minimum were require to issue this Policy. After the effective date of the change, the Stated Death Benefit will be changed according to the following table:
OPTION CHANGE STATED DEATH BENEFIT FROM TO FOLLOWING CHANGE EQUALS: Option 1 Option 2 Stated Death Benefit prior to such change minus the Account Value as of the effective date of the change. Option 2 Option 1 Stated Death Benefit prior to such change plus the Account Value as of the effective date of the change. Option 1 Option 3 Stated Death Benefit prior to such change minus (i) the sum of the premiums paid, plus (ii) Partial Withdrawals taken as of the effective date of the change. Option 3 Option 1 Stated Death Benefit prior to such change plus (i) the sum of the premiums paid, minus (ii) Partial Withdrawals taken as of the effective date of the change. Option 2 Option 3 Stated Death Benefit prior to such change plus (i) the Account Value as of the effective date of the change, minus (ii) the sum of the premiums paid minus Partial Withdrawals taken as of the effective date of the change. Option 3 Option 2 Stated Death Benefit prior to such change plus (i) the sum of the premiums paid minus Partial Withdrawals taken as of the effective date of the change, minus (ii) the Account Value as of the effective date of the change.
For purposes of a death benefit option change, the Account Value will be allocated to each coverage segment in the same proportion that the Stated Death Benefit of that segment bears to the sum of all Stated Death Benefit segments. See Changes In Death Benefit Amounts, page 26. We do not adjust the Target Premium when this type of change is made. See Sales Charges, page 38. These increases and decreases in Stated Death Benefit are made so that the amount of teh Base Death Benefit remains the same on the date of the change. When the Base Death Benefit remains the same, there is no immediate change in the Net Amount at Risk, which is the amount on which our cost of insurance charges are based. See Cost Of Insurance Charges, page 39. In addition, there will be no change to the amount of term insurance if Adjustable Term Insurance Rider has been added. Any changes in the death benefit option of the Policy will go into effect as of the Policy anniversary on or following the date we approve the request for the change. A request for a change must be received at our Customer Service Center at least 30 days prior to the Policy anniversary. After the request is approved, we will send a new policy schedule page. This schedule should be attached to the Policy. We may also ask that the Policy be returned to our Customer Service Center so that we can note the change in the Schedule. GUARANTEED MINIMUM DEATH BENEFIT PROVISION Generally, the length of time the Policy remains in force depends on the Net Account Value of the Policy. Because the charges that maintain the Policy are deducted monthly from the Account Value, coverage will last as long as the Net Account Value is sufficient to pay these charges. The investment experience of any amounts in the Divisions of the Variable Account and the interest earned in the Guaranteed Interest Division will affect the amount of the Account Value and, as a result, the length of time the Policy remains in force without the payment of additional premiums. When applying for the Policy, one of two Guaranteed Minimum Death Benefit provisions may be chosen, which may extend the period that the Stated Death Benefit of the Policy will remain in effect if the Divisions of the Variable Account suffer adverse investment experience. The two options vary primarily by the length of time which they cover, which we call the "Guarantee Period." The first option has a Guarantee Period of 10 Policy years or to the Insured's Age 65, whichever is later; that is, it protects the Stated Death Benefit of the Policy for a limited number of Policy years. The second option has a Lifetime Guarantee Period; it protects the Stated Death Benefit for the life of the Insured to the Maturity Date. See Choice of Guaranteed Minimum Death Benefit Provisions, page 27. ________________________________________________________________________________ 24 Strategic Advantage However, the Guaranteed Minimum Death Benefit provision does not apply to the Adjustable Term Insurance Rider or to any other Riders. Therefore, if the Net Account Value is insufficient to pay all of the deductions as they come due, only the Stated Death Benefit portion of the Policy will be guaranteed to stay in force under the Guaranteed Minimum Death Benefit provisions; any attached Riders will lapse. See Lapse, page ___________________________. The Guaranteed Minimum Death Benefit provisions may not be available in all states. REQUIREMENTS TO MAINTAIN THE GUARANTEE PERIOD The Guaranteed Minimum Death Benefit provisions require premium payment levels referred to as the "Guarantee Period Annual Premium" that are higher than the Minimum Annual Premium. Although the required Guarantee Period Annual Premium levels are different for the two Guarantee Periods, the mechanics of the Guaranteed Minimum Death Benefit provisions are similar. As of each Monthly Processing Date we will perform a test to see if sufficient premiums have been paid to keep the guarantee in place. If (i) the actual premiums paid, minus the amount of any Partial Withdrawals and any Policy Loan and accrued loan interest, equals or exceeds (ii) one twelfth of the Guarantee Period Annual Premium for the option chosen times the number of complete months the Policy has been in force, the Guarantee Period will remain in effect regardless of the investment experience of the Divisions of the Variable Account. If the Policy fails to meet this test on any Monthly Processing Date, the Guarantee Period and therefore the Guaranteed Minimum Death Benefit provision will terminate. The required premiums for the Guarantee Period chosen will be listed in the Schedule of the Policy. If the Policy benefits are increased, the Guarantee Period Annual Premium will also be increased. In order to determine the required premium to maintain the Guarantee Period, one twelfth of each Guarantee Period Annual Premium is multiplied by the number of months this amount was in effect. Each of these resulting amounts is summed and the total is used in (ii) above. The Guarantee Period will also be terminated if the Net Account Value on any Monthly Processing Date is not diversified according to the following rules: a) No more than 35% of the Net Account Value may be invested in any one Division, and b) The Net Account Value must be invested in at least five Divisions. The Automatic Rebalancing feature may be utilized to assist in meeting these diversification requirements. Also, the Policy will be deemed to satisfy our requirements for diversification if Dollar Cost Averaging is being utilized and the resulting transfers are being directed into at least four other Divisions with no more than 35% of any transfer being to any one Division. See Dollar cost Averaging, page 33, and Automatic Rebalancing, page 13. Once terminated, the Guaranteed Minimum Death Benefit provision cannot be reinstated. There is a charge for the Guaranteed Minimum Death Benefit. See Guaranteed Minimum Death benefit Charge, page 27. This charge will end at the conclusion of the Ten Year/Age 65 Guarantee Period if that option has been chosen, and it will end for either option if the Policy fails the monthly premium test or the diversification test. Please refer to the Policy for additional information on the Guaranteed Minimum Death Benefit provisions or ask a Registered Representative for a personalized illustration of these options. CHANGES IN DEATH BENEFIT AMOUNTS An increase or a decrease in the death benefit of the Policy may be requested by the Owner. This request must be received by our Customer Service Center at least 30 days prior to the Policy anniversary. Any change in coverage may not be for an amount less than $1,000. Any changes in the death benefit of the Policy will go into effect as of the Policy anniversary on or following the date we approve the request for the change. After the request is approved, we will send a new Schedule which will include the Stated Death Benefit, the benefit under any Riders, if applicable, the guaranteed cost of insurance rates, and the new guideline annual premium. This notice should be attached to the Policy. We may also ask that the Policy be returned to our Customer Service Center so that we can note the change in the Schedule. While the Policy is in force, its Target or Stated Death Benefit may be increased prior to the Policy anniversary on which the Insured is Age 86. The Stated Death Benefit may be decreased if the request occurs at least two years from the Policy Date or at least two years after the last increase was made. Decreases in the death benefit generally may not decrease the Stated Death Benefit below the minimum we require to issue this Policy. ________________________________________________________________________________ 25 Strategic Advantage There may be tax consequences to the decrease, See Life Insurance Definition, page 47, and Modified Endowment Contract, page 48. Satisfactory evidence that the Insured is still insurable must be provided when the death benefit is increased. Unless otherwise indicated, any request for an increase to the Target Death Benefit will be assumed to also be a request for an increase to the Stated Death Benefit so that the amount of the Adjustable Term Insurance Rider, if it is included with the Policy at the time of the increase, will not change. A requested increase in the Stated Death Benefit will create a new coverage segment for which cost of insurance and other charges will be computed separately. See CHARGES, DEDUCTIONS AND REFUNDS, page 37. Increases in Stated Death Benefit resulting from death benefit option changes do not create new coverage segments, rather, they merely increase the size of the existing segment(s) of Stated Death Benefit. As discussed below, once created, a new coverage segment of Stated Death Benefit can never be entirely eliminated unless required differently by state law. If an increase creates a new coverage segment of Stated Death Benefit, premiums paid after the increase will be allocated to the original and the new coverage segments in the same proportion that the guideline annual premiums defined by the Federal income tax laws for each segment bear to the sum of the guideline annual premiums for all base segments. The guideline annual premiums will be shown in the Schedule for each coverage segment. Net Amount at Risk will be allocated to each coverage segment in the same proportion that the Stated Death Benefit for that segment bears to the sum of the Stated Death Benefit for all segments. Requested reductions in the death benefit will first be applied to reduce the Target Death Benefit. The Stated Death Benefit will be decreased only after Adjustable Term Insurance Rider coverage has been reduced to zero. If more than one coverage segment of Stated Death Benefit exists, any subsequent reduction in Stated Death Benefit will be allocated between coverage segments in the same proportion that the Stated Death Benefit of each segment bears to the total Stated Death Benefit prior to the reduction unless required differently by state law. In some cases, we may not approve a requested change because it would disqualify the Policy as life insurance under applicable Federal income tax law. If we do not approve a change, we will provide notification of our decision about making the change. See TAX CONSIDERATIONS, page 47. An increase in death benefit may be canceled by the Owner within 10 days after receipt of a new Schedule showing the increase or as otherwise specified by law. If an increase is canceled, we will refund any charges attributable to the increase. If you cancel a scheduled change or ask for an unscheduled decrease to your Target Death Benefit, we may eliminate any future scheduled increases to the Target Death Benefit. BENEFITS AT MATURITY If the Insured is still living on the Maturity Date, we will pay the Net Account Value to the Policy Owner. The Net Account Value is the Account Value reduced by any outstanding Policy Loan and accrued loan interest. The Policy will then end. The Maturity Date is the Policy anniversary nearest the date on which the Insured attains Age 100. ADDITIONAL BENEFITS The Policy may include additional benefits, which are attached to the Policy by Rider. A charge will be deducted monthly from the Account Value for each additional benefit chosen. These benefits may be canceled at any time. See Modified Endowment Contracts, page ___________________________, for information on the tax effect of adding or canceling these benefits. More details will be included in the Policy if any of these benefits are chosen. From time to time we may make available Riders other than those listed below. Contact a Registered Representative for a complete list of the Riders available. Certain Riders may not be available for all Policies. ACCIDENTAL DEATH BENEFIT RIDER This Rider will pay the benefit amount selected by the Owner if the Insured dies as a result of an accident or if the Insured dies within 90 days of an injury sustained in an accident and the death occurs prior to the Insured's Age 70. ADJUSTABLE TERM INSURANCE RIDER The Death Proceeds may be increased by adding the Adjustable Term Insurance Rider on the life of the Insured. As the name suggests, the Adjustable Term Insurance Rider adjusts over time. ________________________________________________________________________________ 26 Strategic Advantage At issue, a schedule of death benefits called the Target Death Benefit is specified at levels to meet projected needs in the future. The Target Death Benefit may be scheduled to vary as often as each Policy year. The Target Death Benefit will be listed in the Schedule. Subject to our rules, the Target Death Benefit schedule may be changed after issue. See changes In Death Benefit Amount, page 26. The amount of Adjustable Term Insurance Rider in force at any time is the amount needed to fill the difference between the Target Death Benefit specified in the Schedule and the Base Death Benefit in effect. The Adjustable Term Insurance Rider is dynamic in that it adjusts daily for variations in the Base Death Benefit resulting from the Federal income tax law definition of life insurance test chosen. For example, assume the Base Death Benefit increases due to the Federal income tax law definition of life insurance. The Adjustable Term Insurance Rider will adjust to provide Death Proceeds equal to the Target Death Benefit in each year:
Base Death Target Death Adjustable Term Benefit Benefit Insurance Rider Amount - ------- ------- ---------------------- 201,500 250,000 48,500 202,500 250,000 47,500 202,250 250,000 47,750
Since the Adjustable Term Insurance Rider is dynamic, it is possible that the Adjustable Term Insurance Rider amount may be eliminated entirely as a result of increases in the Base Death Benefit due to the definition of life insurance requirements. Using the example outlined above, if the Base Death Benefit under the Policy grew to $250,000, the Adjustable Term Insurance Rider amount would be reduced to zero. (It can never be reduced below zero.) Even though the Adjustable Term Insurance Rider amount is reduced to zero, the Rider will remain in effect until it is removed from the Policy. Therefore, if the Base Death Benefit under the Policy is subsequently reduced below the Target Death Benefit, the Adjustable Term Insurance Rider amount will reappear as needed to maintain the Target Death Benefit at the requested level. Partial Withdrawals and base decreases may reduce the amount of the Target Death Benefit. See Partial withdrawal, page 35. We generally restrict the amount of the Target Death Benefit to an amount not more than ten times the Stated Death Benefit. For example, if the Stated Death Benefit is $100,000 then the maximum amount of Target Death Benefit we will allow will be $1,000,000. Given the flexible nature of the Adjustable Term Insurance Rider, there is no defined premium for the amount of coverage. Instead, a cost of insurance charge is deducted monthly from the Account Value for the Adjustable Term Insurance Rider amount in effect. The cost of insurance charge may be lower than the rates applicable to the Base Death Benefit in the early Policy years, and may be higher in the later Policy years. See Cost Of Insurance Charges, page 39. Since there is no defined premium related to the Adjustable Term Insurance Rider, there are no tax or sales charges associated with this coverage. See Changes In Death benefit Amount, page ___________________________. ADDITIONAL INSURED RIDER This Rider provides for death benefits upon the death of immediate family members of the Insured. A maximum of nine Additional Insured Riders may be added to the Policy. The minimum amount of coverage for each Rider is $10,000 and the maximum coverage for all Additional Insured Riders combined equals five times the Stated Death Benefit of the Policy. GUARANTEED INSURABILITY RIDER This Rider will allow the Owner to increase the Stated Death Benefit of the Policy without providing us with evidence that the Insured remains insurable. Increases are limited in amount and timing. RIGHT TO EXCHANGE RIDER This Rider allows the Owner to change the person insured under the Policy. A change of the Insured may have Federal income tax consequences. If an exchange of Insured occurs, the cost of insurance charges in the future may change but the Account Value will remain unchanged as of the exchange date. There is no charge for this Rider. WAIVER OF COST OF INSURANCE RIDER This Rider provides that during the total disability of the Insured, while the Policy remains in force, the monthly expense charges, cost of insurance charges and Rider charges will be waived and therefore not deducted from the Account Value. If this Rider is added to the Policy, Waiver of Specified Premium Rider may not also be added. ________________________________________________________________________________ 27 Strategic Advantage Waiver of Specified Premium Rider may not also be added. WAIVER OF SPECIFIED PREMIUM RIDER This Rider provides that during the total disability of the Insured, while the Policy remains in force, a specifiedpremium will be credited monthly to the Policy. The amount of premium to be waived, within limits, is the amount specified in the application. If this Rider is added to the Policy, the Waiver of Cost of Insurance Rider may not also be added. POLICY VALUES ACCOUNT VALUE The amount of the Account Value is the sum of the amounts in the Guaranteed Interest Division and in the various Divisions of our Variable Account. It also includes any amount we have set aside in the Loan Division to secure any outstanding Policy Loan. The Account Value therefore reflects all premiums paid, charges made, Loans and Partial Withdrawals taken, investment experience of the Variable Account and earnings accrued in the Guaranteed Interest and Loan Divisions. CASH SURRENDER VALUE The Cash Surrender Value of the Policy equals the Account Value plus any refund of sales charges due. NET CASH SURRENDER VALUE The Net Cash Surrender Value of the Policy is equal to the Cash Surrender Value less the amount of any outstanding Policy Loan and any accrued loan interest. NET ACCOUNT VALUE The Net Account Value of the Policy is equal to the Account Value less the amount of any outstanding Policy Loan and any accrued loan interest. DETERMINING THE VALUE OF AMOUNTS IN THE DIVISIONS OF THE VARIABLE ACCOUNT The amounts included in the Divisions of the Variable Account are measured in terms of Accumulation Units and Accumulation Unit Values. On any given day, the value of the amount in a Division of the Variable Account is equal to the Accumulation Unit Value times the number of Accumulation Units credited to the Policy in that Division. The Accumulation Units of each Division of the Variable Account will have different Accumulation Unit Values. Accumulation Units of a Division are purchased whenever premiums or transfer amounts are allocated to that Division (including transfers from the Loan Division). Accumulation Units are redeemed when Partial Withdrawals are taken or amounts are transferred from a Division of the Variable Account (including transfers to the Loan Division) and to pay the death benefit when the Insured dies. We also redeem Accumulation Units for the monthly deductions from the Account Value and for Policy transaction charges, if any. The number of Accumulation Units purchased or redeemedin a Division of the Variable Account as of any Valuation Date is calculated by dividing the dollar amount of the transaction by the Division's Accumulation Unit Value calculated after the close of business that day. The Accumulation Unit Value of each Division fluctuates with the investment experience of the corresponding Portfolio and reflects the investment income, realized and unrealized capital gains and losses and expenses of the Portfolio. The Accumulation Unit Values also reflect the mortality and expense risk charges we make each day to the Variable Account. See How We Calculate Accumulation Unit Values for Each Division, page 31. Transactions are processed as of the Transaction Date. The Transaction Date is the date we receive a premium or an acceptable written or telephone request at our Customer Service Center. If the premium or request reaches our Customer Service Center on a day which is not a Valuation Date, or after the close of business on a Valuation Date (that is, after 4:00 p.m. Eastern Time), the Transaction Date will be the next succeeding Valuation Date. Monthly deductions against the Account Value are made as of the Monthly Processing Date. Transaction charges are made as of the Transaction Date. The value of any amount allocated to a Division of our Variable Account will go up or down depending on the investment experience of that Division. For amounts allocated to the Divisions of the Variable Account, there is no guaranteed minimum cash value. HOW WE CALCULATE ACCUMULATION UNIT VALUES FOR EACH DIVISION We determine Accumulation Unit Values for the Divisions of the Variable Account as of each Valuation ________________________________________________________________________________ 28 Strategic Advantage Date. All Policy transactions are performed as of a Valuation Date. The Accumulation Unit Value for each Division will generally be set at $10 on the first Valuation Date that there are Policy transactions in that Division of the Variable Account. After that, the Accumulation Unit Value as of any Valuation Date is equal to the Accumulation Unit Value for the preceding Valuation Date multiplied by the Accumulation Experience Factor for that Division for the Valuation Period. We calculate an Accumulation Experience Factor for each Division every Valuation Date as follows: 1. We take the value of the shares belonging to the Division in the corresponding Portfolio as of the close of business that Valuation Date (before giving effect to any Policy transactions for that day, such as premium payments or surrenders). For this purpose, we use the share value reported to us by the managers of the Portfolio. 2. We add any dividends or capital gains distributions declared and reinvested by thePortfolio during the Valuation Period. We subtract from this amount a charge for taxes, if any. 3. We divide this amount by the value of the shares belonging to the Division in the corresponding Portfolio as of the close of business on the preceding Valuation Date. This amount represents the gross experience factor per Accumulation Unit, before reduction for the expenses of the Variable Account. 4. We subtract a charge for the mortality and expense risk assumed by us under the Policy. The daily charge is .002055% of the Accumulation Unit Value, which is equivalent to an annual rate of .75% of the Accumulation Unit Value. If the previous day was not a Valuation Date, then the charge is adjusted for the additional days between valuations. The resulting amount is the Accumulation Experience Factor for the Valuation Period. TRANSFERS OF ACCOUNT VALUES After the Free Look Period, up to 12 transfers between Divisions of the Variable Account or to the Guaranteed Interest Division may be made in each Policy year without charge. There is no limit on the number of transfers that may be made, but we charge a fee of $25 for each additional transfer beyond the first 12. Transfers due to the operation of Automatic Rebalancing or Dollar Cost Averaging are not included in determining the limit on transfers without a charge. Transfer requests should be made in writing to our Customer Service Center. The transfer will take effect as of the Valuation Date we receive the request. The minimum amount we will transfer on any date is $100. This minimum need not come from any one Division or be transferred to any one Division as long as the total amount requested to be transferred equals at least the minimum. However, we will transfer the entire amount in any Division of the Variable Account from which a transfer is requested, if the amount remaining in that Division is less than $100. We reserve the right to limit excessive trading activity, which can disrupt Portfolio management strategy and increase Portfolio expenses. For example, we may refuse to accept or may place certain restrictions on transfers made by third-party agents acting on behalf of multiple Owners or made pursuant to market timing services when we determine, at our sole discretion, that such transfers will be detrimental to the Portfolios and the Owners as a whole. Such transfers may cause increased trading and transaction costs, disruption of planned investment strategies, forced and unplanned portfolio turnover, and lost opportunity costs, and may subject the Portfolios to large asset swings that diminish the Portfolios' ability to provide maximum investment return to all Owners. Transfers from the Guaranteed Interest Division may only be made as described below. Once during the first 30 days of each Policy year, the Owner may transfer amounts from the Guaranteed Interest Division. Transfer requests received within 30 days prior to the Policy anniversary will be deemed to occur as of the Policy anniversary. Transfer requests received on the Policy anniversary or within the following 30 days will be processed. Transfer requests received at any other time will not be processed. Transfer amounts from the Guaranteed Interest Division to the Divisions of the Variable Account are limited to the greatest of (i) 25% of the balance in the Guaranteed Interest Division at the time of the first transfer or withdrawal in a Policy year, (ii) the sum of any amounts transferred and withdrawn from the Guaranteed Interest Division in the prior Policy year or, (iii) $100. If telephone privileges have been elected in an application or written notice has been sent to our Customer Service Center requesting this privilege, transfers may be made by telephoning our Customer Service Center. See Telephone Privileges, page 54. ________________________________________________________________________________ 29 Strategic Advantage DOLLAR COST AVERAGING We offer a feature called Dollar Cost Averaging to Owners who have at least $10,000 of Account Value invested in either the Division investing in the Fidelity VIP Money Market Portfolio or the Neuberger & Berman AMT Limited Maturity Bond Portfolio of the Variable Account. The main objective of Dollar Cost Averaging is to protect Policy values from short-term price fluctuations. Since the same dollar amount is transferred to other Divisions each month, more units are purchased in a Division if the value per unit that month is low, and fewer units are purchased if the value per unit that month is high. This plan of allocating Policy values reduces the risk of investing too much when the price of a Portfolio's shares is high and too little when the price of a Portfolio's shares is low. With Dollar Cost Averaging, a designated dollar amount of Account Value will be transferred automatically each month from the selected Division to one or more other Divisions of the Variable Account. Dollar Cost Averaging transfers may not be made to the Guaranteed Interest Division. Percentage allocations of the transfer amount must be designated as whole number percentages; no specific dollar designation may be made to the Divisions of the Variable Account. If the Owner elects to transfer to a particular Division, the minimum percentage that may be transferred to that Division is 1% of the total amount transferred. A date for Dollar Cost Averaging to terminate may be specified. A dollar amount may be specified so that when the balance remaining in either the Division investing in the Fidelity VIP Money Market Portfolio or the Neuberger & Berman AMT Limited Maturity Bond Portfolio reaches this dollar amount, Dollar Cost Averaging will terminate. The monthly transfer under Dollar Cost Averaging may beno less than $100 per month and may be no more than one twelfth of the Account Value at the time Dollar Cost Averaging is elected in the Division from which the Dollar Cost Averaging transfers are to be made. Each automatic monthly transfer will take place on the Monthly Processing Date beginning with the first Monthly Processing Date which is at least 30 days after our receipt of the request for Dollar Cost Averaging. However, in no event will Dollar Cost Averaging begin before the Monthly Processing Date following the end of the Free Look Period. If on any Monthly Processing Date, the amount in the Division from which transfers are to be made is equal to or less than the amount to be transferred, the entire remaining amount will be transferred, and Dollar Cost Averaging will end. The amount to be transferred or the Divisions to which transfers are to be made may be changed once each Policy year, and Dollar Cost Averaging may be canceled completely by sending satisfactory notice to our Customer Service Center at least seven days before the next transfer date. If both Dollar Cost Averaging and Automatic Rebalancing are elected, Dollar Cost Averaging will take place first. As of the first Valuation Date of the next calendar quarter after Dollar Cost Averaging has terminated, Automatic Rebalancing will begin. Dollar Cost Averaging is available without charge. If telephone privileges have been elected in an application or if written notice has been sent to our Customer Service Center requesting this privilege, changes to your Dollar Cost Averaging options can be made by telephoning our Customer Service Center. See Telephone Priveleges, page 54. AUTOMATIC REBALANCING The Automatic Rebalancing feature provides a method for maintaining a balanced approach to investing Account Values and for simplifying the process of asset allocation over time. There is no charge for this feature and any transfers as a result of the operation of this feature are not counted toward the limit of 12 transfers per Policy year without an additional transfer charge. During the operation of the Automatic Rebalancing feature, transfers among the Divisions may be accomplished only by changing premium allocation percentages. The Automatic Rebalancing feature may be elected by designation on the application or at any subsequent time by completing the appropriate form. Automatic Rebalancing matches Account Value allocations over time to the allocation percentages for new premiums. As of the first Valuation Date of each calendar quarter, we will automatically rebalance the amounts in each of the Divisions to match the current premium allocation percentages. This will rebalance the amounts in Divisions that may be out of line with the allocation percentages, which may result, for example, from Divisions which underperform the other Divisions in certain quarters. If this feature is elected, as of the first Valuation Date of the next calendar quarter we will transfer amounts among the Division so that the ratio of the Accumulation Value in each Division to the total Account Value matches the selected allocation percentage for that Division. If Automatic Rebalancing is elected with the Policy application, the first transfer will occur as of the first ________________________________________________________________________________ 30 Strategic Advantage Valuation Date of the next calendar quarter following the end of the Free Look Period. If this feature is elected after the Policy Date, the first transfer will be processed as of the first Valuation Date of the next calendar quarter after we receive notification at our Customer Service Center and the Free Look Period has ended. The allocation percentages for Automatic Rebalancing may be changed at any time and the Account Value will be reallocated as of the Valuation Date that we receive the allocation instructions at our Customer Service Center. Any reduction in the allocation to the Guaranteed Interest Division, however, will be considered a transfer from the Division and, therefore, must comply with the maximum transfer amount and time limitations on transfers from the Guaranteed Interest Division, as described in Transfers of Account Values on page 32. We will not process an Automatic Rebalancing request which is in conflict with these provisions. The Automatic Rebalancing feature may be terminated at any time, so long as we receive notice of the termination at least seven days prior to the first Valuation Date of the next calendar quarter. If the Guarantee Period is in effect and the Automatic Rebalancing feature is terminated, diversification of the Net Account Value must be maintained for the guarantee to continue. See Guaranteed Minimun Death Benefit, page ___________________________. If the Automatic Rebalancing feature is active on a Policy and a request for an allocation which does not meet the requirements is made, we will notify the Owner that the allocation must be changed. Any transfers as a result of the operation of the Automatic Rebalancing feature are not counted toward the limit of 12 transfers that can be made each Policy year without a transfer charge. However, we will charge a fee of $25 each time premium allocation is changed more often than five times per Policy year; otherwise, there is no charge for this feature. If both Dollar Cost Averaging and Automatic Rebalancing have been elected, Dollar Cost Averaging will take place first. As of the first Valuation Date of the calendar quarter after Dollar Cost Averaging has terminated, Automatic Rebalancing will begin. If telephone privileges have been elected in an application or if written notice has been sent to our Customer Service Center requesting this privilege, changes to the Automatic Rebalancing options can be made by telephoning our Customer Service Center. See Telephone Privileges, page 54. POLICY LOANS At any time after the first Policy anniversary or as otherwise required by law, the Owner may borrow against the Policy by using it as security for a loan. The amount borrowed is called a Policy Loan. Unless otherwise required by state law, any new Policy Loan must be at least $100. The maximum amount which can be borrowed as of any Valuation Date equals (a) minus (b) where (a) is equal to 1.) Account Value minus 12 times the current monthly deduction; 2.) multiplied by 1.03; 3.) divided by 1.0375; and where (b) is equal to any outstanding Policy Loan and accrued loan interest. Maximum loan amounts may be different if required by state law. A Policy Loan may be requested by contacting our Customer Service Center. Loan interest charges on a Policy Loan accrue daily at a compound annual interest rate of 3.75%. Interest is due in arrears on each Policy anniversary. If the interest is not paid when it is due, it will be added to the Policy Loan as of the Policy anniversary. When an additional loan is requested, the amount taken will be added to the outstanding Policy Loan so only one loan is outstanding at any time. A Policy Loan may be fully or partially repaid at any time while the Policy is in force. Unless otherwise indicated, we will assume that any payments, other than Scheduled Premiums, constitute Policy Loan repayments and not premiums. When a Policy Loan is taken, or if the loan interest is not paid on the Policy anniversary, an amount equal to the Policy Loan amount or interest due is transferred from the Divisions of the Variable Account and the Guaranteed Interest Division to the Loan Division to secure the loan. The Loan Division is part of our General Account, separate from the Guaranteed Interest Division. When transfers are made to the Loan Division, units of the Variable Account Divisions are redeemed sufficient to cover the amount of the loan which is taken from the Variable Account. We will deduct the amount transferred from each Division in the same proportion that the Account Value in that Division bears to the Net Account Value immediately prior to the loan transaction. The amounts in each Division will be determined as of the Valuation Date we receive the request for a loan. The Loan Division is credited as of each Valuation Date with interest at a compound annual rate of 3% in all Policy years. On Policy anniversaries, the amount of interest credited to the Loan Division for the Policy year will be transferred from the Loan Division. When a loan repayment is made, an amount equal to the payment is transferred from the Loan Division. Amounts transferred from the Loan ________________________________________________________________________________ 31 Strategic Advantage Division will be allocated to the Divisions of the Variable Account and the Guaranteed Interest Division based on the current premium allocation instructions unless a different allocation is requested. A Loan against the Policy will have a permanent effect on the Account Value and, therefore, on the benefits under this Policy, even if the Loan is repaid. When borrowing against the Policy, an amount equal to the Policy Loan is transferred to the Loan Division where it earns a guaranteed rate of interest. Premiums or transfer amounts may not be allocated to the Loan Division other than by borrowing additional amounts. If not repaid, the Policy Loan and accrued loan interest will be deducted from the amount of the Death Proceeds paid, the Cash Surrender Value paid on surrender, or the Account Value upon maturity. It may also have an effect on the Guarantee Period and on the length of time the Policy remains in force, since in many cases the Policy will lapse when the Account Value minus Policy Loans and accrued loan interest is insufficient to cover the monthly deductions against the Policy's Account Value. If telephone privileges have been elected in an application or requested by written notice to our Customer Service Center, a Policy Loan may be requested by telephoning our Customer Service Center. Any telephone request for a Policy Loan must be for an amount less than $25,000. See Telephone Privileges, page 54. PARTIAL WITHDRAWALS A Partial Withdrawal may be requested on any Monthly Processing Date after the first Policy anniversary by writing to us at our Customer Service Center. One Partial Withdrawal is allowed each Policy year. The minimum Partial Withdrawal is $100. The maximum Partial Withdrawal is the amount which will leave $500 as the Net Account Value. If a withdrawal of more than this maximum is requested, we will require a full surrender of the Policy. When a Partial Withdrawal is taken, the amount of the withdrawal plus a service fee is deducted from the Account Value. The Stated Death Benefit is not reduced by a Partial Withdrawal taken when the Base Death Benefit has been increased to qualify the Policy as life insurance under the Federal income tax laws (see Life Insurance Definition page 47) and the amount withdrawn is no greater than that amount which reduces the Account Value to the level which no longer requires the Base Death Benefit to be increased for Federal income tax law purposes. For a Policy under an Option 1 death benefit, the Stated Death Benefit is not reduced by a Partial Withdrawal in the circumstances described above. In addition, if no more than 16 years have elapsed since the Policy Date and the Insured is not yet Age 81, a Partial Withdrawal of an amount up to 10% of the Account Value or, if greater, 5% of the Stated Death Benefit, calculated immediately before the Partial Withdrawal is taken will not reduce the Stated Death Benefit. Any additional amount withdrawn reduces the Stated Death Benefit by that additional amount. For a Policy under an Option 2 death benefit, a Partial Withdrawal does not reduce the Stated Death Benefit. For a Policy under an Option 3 death benefit, the Stated Death Benefit may be reduced by the amount of the Partial Withdrawal in excess of premiums paid minus prior Partial Withdrawals taken to the date of the Partial Withdrawal (the excess will be treated as if the Policy were under death benefit Option 1). See Death Benefit Options, page 26. No Partial Withdrawal will be allowed if the Stated Death Benefit remaining in force after the Partial Withdrawal would be reduced below the minimum we require to issue this Policy at the time of the reduction. See Group or Sponsored Arrangements, page 46. Under any death benefit option, if the Base Death Benefit has been increased in order to qualify the Policy as a life insurance contract under the Federal income tax laws, the Partial Withdrawal reduces the Base Death Benefit by an amount greater than the withdrawal, but in no event less than the Stated Death Benefit after the Partial Withdrawal. A partial withdrawal may also reduce the Target Death Benefit. Unless otherwise indicated, we will make the withdrawal from the Guaranteed Interest Division and the Divisions of the Variable Account in the same proportion that each Division bears to the Net Account Value immediately prior to the withdrawal. Withdrawals from the Guaranteed Interest Division may not exceed an amount that is greater than the total withdrawal times the ratio of the Account Value in the Guaranteed Interest Division to the total Net Account Value immediately prior to the withdrawal. A new Schedule reflecting the effect of the withdrawal will be sent if there is a change to the Stated Death Benefit or to the Target Death Benefit. We may ask that the Policy be returned to our Customer Service Center to make this change. The withdrawal and any reductions in ________________________________________________________________________________ 32 Strategic Advantage death benefits will be effective as of the Valuation Date we receive the request. If telephone privileges have been elected, requests for Partial Withdrawals may be made by telephoning our Customer Service Center. Any telephone request for a Partial Withdrawal must be for an amount less than $25,000. See Telephone Privileges, page 54. Partial Withdrawals may have adverse tax consequences. See Modified Endowment Contracts, page 48. SURRENDER The Policy may be surrendered for its Net Cash Surrender Value at any time while the Insured is living. In order to surrender the Policy, a written request and the Policy should be sent to our Customer Service Center. The Net Cash Surrender Value of the Policy equals the Cash Surrender Value minus any Policy Loan and accrued loaninterest. We will compute the Net Cash Surrender Value as of the Valuation Date we receive the request and the Policy at our Customer Service Center, and all insurance coverage will end as of that date. A surrender of the Policy for its Net Cash Surrender Value may have adverse tax consequences. See Modified Endowment Contracts, page 48. RIGHT TO EXCHANGE POLICY During the first 24 months following the date we issue the Policy or add a coverage segment, the Policy provides a right to exchange the Policy from one in which the investment experience is not guaranteed into a guaranteed Policy unless required differently by state law. This is accomplished by the transfer of the entire amount in the Divisions of the Variable Account to the Guaranteed Interest Division, and the allocation of all future premium payments to the Guaranteed Interest Division. This will, in effect, serve as an exchange of the Policy for the equivalent of a flexible premium universal life insurance policy. No charge will be imposed on the transfer in exercising this exchange privilege. See The Guaranteed Interest Division, page 23. When this right is exercised, we will not allow for the allocation of future premium payments or transfers to the Divisions of the Variable Account. LAPSE Insurance coverage will continue as long as the Net Account Value of the Policy is sufficient to pay all the deductions that are taken out of the Account Value each month. In addition, during the first three Policy years (the special continuation period), if on each Monthly Processing Date the sum of the premiums paid, less the sum of Partial Withdrawals, any outstanding Policy Loan and accrued loan interest is greater than or equal to one twelfth of the Minimum Annual Premium times the number of completed Policy months, then the Policy and all attached Riders are guaranteed not to lapse, regardless of the Net Account Value. IF GUARANTEED MINIMUM DEATH BENEFIT PROVISION IS NOT IN EFFECT Unless the Guaranteed Minimum Death Benefit provision is in effect, or the special continuation period is in effect and its requirements have been met, the Policy including all attached Riders will lapse in its entirety on any Monthly Processing Date that the Net Account Value of the Policy is not sufficient to pay all the monthly deductions from the Account Value. A 61-day grace period will begin on that Monthly Processing Date. See Grace Period, page 35. If we do not receive payment of the requested amount in full within the 61 days, the Policy and all Riders attached will lapse without value. We will withdraw any remaining balance of the Account Value from the Divisions of the Variable Account and Guaranteed Interest Division. Wewill deduct any amount owed to us against the Account Value. We will inform the Owner that the Policy has ended. If the Insured dies during the grace period, we will pay the Death Proceeds to the Beneficiary that reflect reductions for Policy Loans, accrued loan interest and any monthly deductions due. IF THE GUARANTEED MINIMUM DEATH BENEFIT PROVISION IS IN EFFECT After the special continuation period, if the Guaranteed Minimum Death Benefit provision is in effect, the Stated Death Benefit of the Policy will not lapse during the Guarantee Period even if the Net Account Value is not sufficient to cover all the deductions from the Account Value on any Monthly Processing Date. See Guaranteed Minimum Death Benefit, page 27. The benefits provided by Riders attached to the Policy and any amount by which the Base Death Benefit exceeds the Stated Death Benefit are not protected by the Guaranteed Minimum Death Benefit provision. Therefore, these portions of the Policy benefits will lapse ________________________________________________________________________________ 33 Strategic Advantage if the Net Account Value is not sufficient to cover all the deductions from the Account Value on any Monthly Processing Date (unless the policy is in the three year special continuation period). While the Guaranteed Minimum Death Benefit provision applies (unless the policy is in the three year special continuation period), the Account Value may be reduced by monthly deductions, but not below zero. Any monthly deductions during the Guarantee Period which would reduce the Net Account Value below zero will be permanently waived. The Guaranteed Minimum Death Benefit provision will be terminated if the Policy does not meet the monthly premium test or if the Net Account Value is not diversified according to our requirements as explained in Guaranteed Minimum Death Benefit, page 27. If the Guaranteed Minimum Death Benefit provision is terminated the normal test for lapse will resume. See Lapse, page 36. GRACE PERIOD If the following conditions occur as of a Monthly Processing Date, the Policy will enter into the 61 day Grace Period: (i) The Net Account Value is zero or less; and (ii) The three year special continuation period has expired or the required premium has not been paid; and (iii) The Guarantee Period has expired or been terminated. We will, at least 30 days before the end of a grace period, notify the Owner or any assignee in writing at the last known address on our records that the grace period has begun. The notification will include the amount of premium payment necessary to reinstate the Policy and all Riders attached. The premium required to reinstate the Policy is generally the amount of past due charges plus the amountthat will cover estimated monthly deductions for the Policy and all attached Riders for the following two months. If we receive payment of this amount before the end of the grace period, we will use the amount sent us to make the overdue deductions. Any balance remaining will be applied to the Account Value in the same manner as other premium payments. REINSTATEMENT The Policy and its Riders may be reinstated within five years after lapse for failure to pay sufficient premiums prior to the end of the grace period. Unless otherwise required by state law, we will reinstate the Policy and any Riders if: (i) The Policy has not been surrendered for its Net Cash Surrender Value; (ii) Evidence satisfactory to us that the Insured and the Insureds under any Riders are still insurable according to our normal rules of underwriting for this type of Policy is provided to us; and (iii) A premium payment sufficient to keep the Policy and any Riders in force from the beginning of the grace period to the end of the grace period and for two months following the date of the reinstatement is made (unless required differently by state law). The reinstatement will be effective as of the Monthly Processing Date following our approval of the reinstatement application. We will also reinstate any Policy Loan which existed when coverage ended, with accrued loan interest to the date of lapse. Net Premiums received after reinstatement will be allocated according to the premium allocation instructions in effect at the start of the grace period or as otherwise directed by the Owner. CHARGES, DEDUCTIONS AND REFUNDS DEDUCTIONS FROM PREMIUMS Unless a Policy Loan is outstanding (see Policy Loans, page 34), any payment received before the Maturity Date is considered a premium. Certain expenses are deducted from premium payments. The remainder of each premium (the Net Premium) is then added to the Account Value. The expenses which are deducted from the premium include the tax charges and the sales charge. TAX CHARGES All states levy taxes on life insurance premium payments. The amount of these taxes vary from state to state, and may vary from jurisdiction to jurisdiction within a state. We currently deduct an amount equal to 2.5% of each premium to pay applicable premium taxes. The 2.5% rate approximates the average tax rate we expect to pay on premiums from all states. A charge currently equal to 1.5% of each premium payment is deducted to cover our estimated cost for the Federalincome tax treatment of deferred acquisition costs ________________________________________________________________________________ 34 Strategic Advantage determined solely by the amount of life insurance premiums we receive. This charge for deferred acquisition costs is reasonable in relation to Security Life's increased Federal income tax burden under Internal Revenue Code Section 848 resulting from the receipt of premium payments. Except as limited by state law, we reserve the right to increase or decrease the premium expense charge for taxes due to any change in tax law. We further reserve the right to increase or decrease the premium expense charge for the Federal income tax treatment of deferred acquisition costs due to any change in the cost to us. SALES CHARGES A percentage of each premium is deducted to compensate us for a portion of the cost of selling the Policy. The percentage deducted is based on the amount of premium paid and the number of years since the Policy Date or the date of an increase in coverage. For each of the first five Policy years, this charge is equal to 8% of premiums paid up to the Target Premium and 3% of premiums paid in excess of the Target Premium. In the sixth Policy year and thereafter, the sales charge is equal to 3% of all premiums paid. Target Premiums are not based on the Scheduled Premium determined when the Policy is purchased. Target Premiums are actuarially determined based on the Age, sex and Premium Class of the Insured. See Premiums, page 24. The Target Premium for the Policy and any Stated Death Benefit coverage segments added since the Policy Date will be listed in the Schedule. For a Policy with multiple coverage segments of Stated Death Benefit, premiums paid are allocated to the segments in the same proportion that the guideline annual premium (as defined by the Federal income tax law) for each segment bears to the total guideline annual premium for the Stated Death Benefit of the Policy. The sales charge covers the cost of distribution, costs of preparing our sales literature, other promotional expenses, and other direct and indirect expenses. The amount of this charge cannot be specifically related to sales expenses in a particular year since we recover these costs over the period the Policies remain in effect. We pay the sales expenses from our own resources, including this sales charge and any profit we may earn on the other charges deducted under the Policy. The sales charge may be reduced or waived for certain group or sponsored arrangements. DAILY DEDUCTIONS FROM THE VARIABLE ACCOUNT MORTALITY AND EXPENSE RISK CHARGE Each day a charge is deducted for mortality and expense risks we assume. This charge is equal to 0.002055% perday of the amount in the Divisions of the Variable Account, which is equivalent to an annual rate of 0.75% of the portion of the Account Value allocated to the Variable Account. We assess the mortality and expense risk charge to compensate us for assuming mortality and expense risks under the Policies. The mortality risk we assume is that Insureds, as a group, may live for a shorter period of time than estimated. The expense risk we assume is that other expenses we incur in issuing and administering the Policies and operating the Variable Account will be greater than the amount we estimated when setting the charges for these expenses. We will realize a profit from this fee to the extent it is not needed to provide benefits and pay expenses under the Policies. We may use this profit for other purposes, including any distribution expenses not covered by the sales charge. This charge is not assessed against the amount of Account Value which is allocated to the Guaranteed Interest Division, nor to amounts in the Loan Division. We credit the Account Value with a persistency refund equivalent to 0.5% per year for each coverage segment of Stated Death Benefit that has been in force for at least 10 Policy years, which effectively reduces the charge for mortality and expense risks. See Persistency Refund, page 40. MONTHLY DEDUCTIONS FROM THE ACCOUNT VALUE The following charges are deducted from the Account Value on each Monthly Processing Date. These deductions are taken from the Divisions of the Variable Account and the Guaranteed Interest Division in the same proportion that the Account Value in each Division bears to the total Net Account Value as of the Monthly Processing Date. INITIAL POLICY CHARGE The initial Policy charge is $10 per month for the first five Policy years and is guaranteed never to exceed this amount. This charge covers the costs of setting up the Policy, other than sales expenses, such as application processing, medical examinations, establishment of Policy records and insurance underwriting costs. This ________________________________________________________________________________ 35 Strategic Advantage charge is designed to reimburse us for expenses and we do not expect to gain from it. MONTHLY ADMINISTRATIVE CHARGE This charge is comprised of a per Policy charge of $5 per month plus a charge of $0.0125 per thousand of Stated Death Benefit or Target Death Benefit, if greater, and is guaranteed never to exceed this amount. The per thousand charge is limited to $15 per month. This charge is designed to cover the ongoing costs of maintaining the Policy, such as premium billing and collections, claim processing, Policy transactions, recordkeeping, reporting and other communications with Owners, and other expenses andoverhead. This charge is designed to reimburse us for expenses and we do not expect to gain from it. COST OF INSURANCE CHARGES The cost of insurance charges compensate us for providing insurance protection under the Policy. The cost of insurance charges are calculated monthly, and equal our current monthly cost of insurance rate times the Net Amount at Risk for each portion of the death benefit. Net Amount at Risk for each portion of the death benefit is calculated at the beginning of the Policy month. The Net Amount at Risk for the Base Death Benefit is equal to the difference between the current Base Death Benefit and the amount of the Account Value. For this purpose, the amount of the Account Value is determined after deduction of charges due on that date, other than cost of insurance charges for the Base Death Benefit, any Adjustable Term Insurance Rider, and Waiver of Cost of Insurance Rider. The Net Amount at Risk for the Adjustable Term Insurance Rider is equal to the amount of the benefit provided. If the Base Death Benefit at the beginning of the month is increased due to the requirements of Federal income tax law definition of life insurance, Net Amount at Risk for the Base Death Benefit that month will also increase, but the Net Amount at Risk for any Adjustable Term Insurance Rider may be reduced. Therefore, the amount of the cost of insurance charges will vary from month to month with changes in the Net Amount at Risk, changes in the relative makeup of the death benefit, and with increasing Age of the Insured. The cost of insurance rates are based on the Age, sex and Premium Class of the Insured on the Policy Date or at the time a Base coverage segment is added, as well as the length of time the Policy or coverage segment has been in effect. Unisex rates are used where appropriate under applicable law, currently including the state of Montana and any Policies purchased by employers and employee organizations in connection with employment-related insurance or benefit programs. Net Amount at Risk is allocated to Stated Death Benefit coverage segments in the same proportion that the Stated Death Benefit of each segment bears to the sum of the Stated Death Benefit for all coverage segments as of the Monthly Processing Date. Separate cost of insurance rates apply to the Base Death Benefit, the Adjustable Term Insurance Rider and any additional Base coverage segments. We may change these rates from time to time, but they will never be more than the guaranteed maximum rates set forth in the Policy. The guaranteed maximum rates for fully underwritten policies are based on the 1980 Commissioners Standard Ordinary Mortality Table. We may offer Policies on a guaranteed issue basis to certain group or sponsored arrangements. If an eligible group or sponsored arrangement purchases Policies on a guaranteed issue basis, the Policies will be issued up to a predetermined face amount limit, with only minimalevidence of insurability. Because only limited underwriting information is obtained, Policies issued on a guaranteed issue basis may present additional mortality cost to us compared to underwritten Policies. We will charge increased cost of insurance rates for guaranteed issue Policies. The amount of the increased charges will depend on the issue Age of the Insured, and may also depend on the size of the group and the total premium to be paid by the group. Under guaranteed issue Policies, the overall charges for insurance will be higher than under a comparable underwritten Policy issued in the nonsmoker standard or smoker standard class. This means that an Insured may be able to obtain individual, underwritten insurance coverage at a lower overall cost. The guaranteed rates for guarantee issue policies are no greater than 135 percent of the maximum rates that could be charged based on the 1980 Commissioner's Standard Ordinary Mortality Table ("1980 CSO Table"). The guaranteed rates are higher than 100 percent of the maximum rates in the 1980 CSO Table because we use simplified underwriting procedures whereby the Insured may not be required to submit to a medical or paramedical examination. The current cost of insurance rates after the 15th Policy Year are generally lower than 100 percent of the 1980 CSO Table. Any change in the current cost of insurance rates will apply to all persons of the same Age and rate class. The maximum rates for the initial and any new coverage segment will be printed in the Schedule which we will provide to you. CHARGES FOR ADDITIONAL BENEFITS The cost of any additional benefits added by Rider will be deducted monthly on the Monthly Processing Date. We ________________________________________________________________________________ 36 Strategic Advantage may change these charges, but the Schedule contains tables showing the guaranteed maximum rates for all of these benefits. See Additional Benefits, page 29. GUARANTEED MINIMUM DEATH BENEFIT CHARGE If the Guaranteed Minimum Death Benefit is purchased, we currently charge $0.005 per thousand of Stated Death Benefit each month during the Guarantee Period. This charge is guaranteed never to exceed $0.01 per thousand of Stated Death Benefit each month. CHANGES IN MONTHLY CHARGES Any changes in the cost of insurance charges, charges for additional benefits, or guaranteed minimum death benefit charge will be made by class of Insured and will be based on changes in future expectations about such things as investment earnings, mortality, the length of time policies will remain in effect, expenses and taxes. In no event will they exceed the guaranteed maximum rates defined in the Policy. POLICY TRANSACTION FEES In addition to the deductions described above, we charge fees for certain Policy transactions. Transaction fees are taken from the Divisions of the Variable Account and the Guaranteed Interest Division in the same proportion that the Account Value in each Division bears to the total Net Account Value immediately after the transaction for which the fee is charged. PARTIAL WITHDRAWAL A service fee equal to the lesser of $25 or 2% of the amount requested will be charged against the Account Value for each Partial Withdrawal. See Partial Withdrawals, page 35. TRANSFERS We charge a fee of $25 for each additional transfer beyond the first twelve in a Policy year. See Transfers of Account Values, page 13. All transfers included in one transfer request count as a single transfer when we calculate the fee. There will not be a transfer fee for transfers of Account Value into the Guaranteed Interest Division pursuant to the Exchange Right provided by this Policy. See Right to Exchange Policy, page 36. PREMIUM ALLOCATION CHARGES We charge a fee of $25 each time the premium allocation is changed beyond five times per Policy year. ILLUSTRATIONS We reserve the right to charge a fee, not to exceed $25, for Policy illustrations in excess of one per Policy year. PERSISTENCY REFUND Long-term Owners of Strategic Advantage will receive a persistency refund. Each month the Policy or a coverage segment of Stated Death Benefit remains in force after its tenth Policy anniversary, we will credit the Account Value with a refund equivalent to 0.5% of the Account Value on an annual basis for that segment (0.04167% monthly). For purposes of this calculation, Account Value will be allocated to each coverage segment based upon the number of completed Policy years that segment has been in force and the size of the guideline annual premium as defined by the Federal income tax law definition of life insurance. The Persistency refund will be added to the Divisions of the Variable Account and the Guaranteed Interest Division in the same proportion that the Account Value in each Division bears to the Net Account Value as of the Monthly Processing Date. The following is an example of how the persistency refund affects the Account Value each month if the policy has no loan: Account Value = $10,000 (all in the Variable Divisions) Monthly persistency refund Rate = .0004167 Persistency refund = 10,000 x .0004167 = $4.17
Before After Persistency Persistency Refund Refund ------ ------ Variable $10,000.00 $10,004.17 Divisions
The following is an example of how the persistency refund affects the Account Value each month if the Policy has a loan: Account Value = $10,000 Account Value in the Variable Divisions = $5,000 Account Value in the Loan Division = $5,000 Monthly persistency refund Rate = .0004167 Persistency refund = 10,000 x .0004167 = $4.17
Before After Persistency Persistency Refund Refund ------ ------ Variable $ 5,000.00 $ 5,004.17 Divisions Loan $ 5,000.00 $ 5,000.00 Division
- -------------------------------------------------------------------------------- 37 Strategic Advantage REFUND OF SALES CHARGES If the Policy has not lapsed, we will, upon full surrender of the Policy within the first two Policy years, refund a portion of the sales charges previously deducted from premiums paid. In the first Policy year, the amount of the refund is equal to 5% of the premiums paid up to the target premium in that year. In the second Policy year, the refund is equal to 2.5% of the premiums paid up to the target premium in the first Policy year. After the second Policy anniversary, there is no refund of sales charges. CHARGES FROM PORTFOLIOS The Variable Account purchases shares of the Portfolios at net asset value. That price reflects investment management fees and other direct expenses that have already been deducted from the assets of the Portfolio. The following table describes these investment management fees and other direct expenses of the Portfolios. ________________________________________________________________________________ 38 Strategic Advantage PORTFOLIO ANNUAL EXPENSES (AS A PERCENTAGE OF PORTFOLIOAVERAGE NET ASSETS)/1/
OTHER TOTAL PORTFOLIO PORTFOLIO MANAGEMENT FEES EXPENSES EXPENSES --------- --------------- -------- -------- NEUBERGER & BERMAN ADVISERS MANAGEMENT TRUST/2/ Limited Maturity Bond Portfolio 0.65% 0.13% 0.78% Growth Portfolio 0.83% 0.09% 0.92% Partners Portfolio 0.84% 0.11% 0.95% Government Income Portfolio 0.00% 1.04% 1.02% THE ALGER AMERICAN FUND Alger American Small Capitalization Portfolio 0.85% 0.03% 0.88% Alger American MidCap Growth Portfolio 0.80% 0.04% 0.84% Alger American Growth Portfolio 0.75% 0.04% 0.79% Alger American Leveraged AllCap Portfolio 0.85% 0.24%/3/ 1.09%/3/ FIDELITY VARIABLE INSURANCE PRODUCTS FUND VIP Growth Portfolio 0.61% 0.08% 0.69%/4/ VIP Overseas Portfolio 0.76% 0.17% 0.93%/4/ VIP Money Market Portfolio 0.21% 0.09% 0.30% FIDELITY VARIABLE INSURANCE PRODUCTS FUND II VIP II Asset Manager Portfolio 0.64% 0.10% 0.74%/4/ VIP II Index 500 Portfolio 0.13% 0.15% 0.28%/5/
__________________________ /1/ The preceding Portfolio expense information was provided to us by the Portfolios, and we have not independently verified such information. These Portfolio expenses are not direct charges against Division assets or reductions from Contract values; rather these Portfolio expenses are taken into consideration in computing each underlying Portfolio's net asset value, which is the share price used to calculate the unit values of the Divisions. For a more complete description of the Portfolios' costs and expenses, see the prospectuses for the Portfolios. /2/ Neuberger & Berman Advisers Management Trust (the "Trust") is divided into portfolios ("Portfolios"), each of which invests all of its net investable assets in a corresponding series ("Series") of Advisers Managers Trust. Expenses in the table reflect expenses of the Portfolios and include each Portfolio's pro rata portion of the operating expenses of each Portfolio's corresponding Series. The Portfolios pay Neuberger & Berman Management, Inc. ("NBMI"), an administration fee based on the Portfolios' net asset value. Each Portfolio's corresponding Series pays NBMI a management fee based on the Series' average daily net assets. Accordingly, this table combines management fees at the Series level and administration fees at the Portfolio level in a unified fee rate. See "Expenses" in the Trust's Prospectus. Expenses reflect expense reimbursement. NBMI has voluntarily undertaken to limit the Portfolios' compensation of NBMI and excluding taxes, interest, extraordinary expense, brokerage commissions and transaction costs, that exceed 1% of the Portfolios' average daily net asset value. These expense reimbursement policies are subject to termination upon 60 days written notice to the Portfolios. /3/ The Alger American Leverage AllCap Portfolio's "Other Expenses" includes 0.03% of interest expense. /4/ A portion of the brokerage commissions the Portfolio paid was used to reduce its expenses. In addition, certain funds have entered into arrangements with their custodian and transfer agent expenses. Including these reductions, the total operating expenses presented in the table would have been 0.67% for Growth Portfolio, 0.92% for Overseas Portfolio, and 0.73% for Asset Manager Portfolio. /5/ FMR agreed to reimburse a portion of Index 500 Portfolio's expenses during the period. Without this reimbursement, the funds' management fee, other expenses and total expenses would have been 0.28%, 0.15% and 0.43% respectively for Index 500 Portfolio on a annualized basis. ________________________________________________________________________________ 39 Strategic Advantage INVESCO VARIABLE INVESTMENT FUNDS, INC. INVESCO VIF - Total Return Portfolio 0.75% 0.19% 0.94%/6//7/ INVESCO VIF - Industrial Income Portfolio 0.75% 0.20% 0.95%/6/8/ INVESCO VIF - High Yield Portfolio 0.60% 0.27% 0.87%/6/9/ INVESCO VIF - Utilities Portfolio 0.60% 0.56% 1.16%/6/10/ VAN ECK WORLDWIDE INSURANCE TRUST Worldwide Hard Assets Fund (formerly Gold and Natural Resources Fund) 1.00% 0.24% 1.24% Worldwide Balanced Fund 0.00%/20/ 0.00%/11/ 0.00%/11/
_____________________________________ /6/ The Portfolios' custodian fees were reduced under an expense offset arrangement. In addition, certain expenses of the Portfolio's are being absorbed voluntarily by INVESCO Funds Group, Inc. ("IFG"). The above ratios reflect total expenses, less expenses absorbed by IFG, prior to any expense offset. /7/ Various expenses of the Portfolio were voluntarily absorbed by IFG for the years ended December 31, 1996 and 1995 and the period December 31, 1994. If such expenses had not been voluntarily absorbed, ratio expenses to average net assets would have been 1.30%, 2.51% and 16.44%, respectively, and ratio of net investment income to average net assets would have been 3.08%, 2.41% and (11.72%), respectively. /8/ Various expenses of the Portfolio were voluntarily absorbed by IFG for the years ended December 31, 1996 and 1995 and the period ended December 31, 1994. If such expenses had not been voluntarily absorbed, ratio of expenses to average net assets would have been 1.19%, 2.31% and 32.55%, respectively, and ratio of net investment income to average net assets would have been 2.63%, 2.22% and (30.07%), respectively. /9/ Various expenses of the Portfolio were voluntarily absorbed by IFG for the years ended December 31, 1996 and 1995 and the period ended December 31, 1994. If such expenses had not been voluntarily absorbed, ratio of expenses to average net assets would have been 1.32%, 2.71% and 30.38% respectively, and ratio of net investment income to average net assets would have been 8.74%, 7.05% and (26.92%), respectively. /10/ Various expenses of the Portfolio were voluntarily absorbed by IFG for the years ended December 31, 1996 and 1995. If such expenses had not been voluntarily absorbed, ratio expenses to average net assets would have been 5.36%, and 57.13%, respectively, and ratio of net investment income to average net assets would have been (1.28%), and (52.86), respectively. /11/ The Portfolio's expenses were voluntarily reduced by the Portfolio's investment manager. Abseent such reimbursement, "Management Fees", "Other Expenses" and "Total Portfolio Expenses" would have been 0.75%, 0.60% and 1.35%, respectively. "Other Expenses" of 0.60% are based on a net asset estimation of $30 million. ________________________________________________________________________________ 40 Strategic Advantage GROUP OR SPONSORED ARRANGEMENTS This Policy is available for purchase by individuals, corporations and other institutions. For group or sponsored arrangements (including home office employees of Security Life) and for special exchange programs which Security Life may offer from time to time, we may reduce or eliminate the sales charge, the length of time the sales charge applies, the administrative charge, the minimum Stated Death Benefit, the maximum Target Death Benefit, the Minimum Annual Premium, the Target Premium, cost of insurance charges, or other charges normally assessed to reflect the expected economies resulting from a group or sponsored arrangement. We may also allow Partial Withdrawals to be taken without a charge. Group arrangements include those in which a trustee, an employer or an association either purchases Policies covering a group of individuals on a group basis or endorses the Policy to a group of individuals. Sponsored arrangements include those in which an employer or association allows us to offer Policies to its employees or members on an individual basis. Our costs for sales, administration and mortality generally vary with the size and stability of the group, among other factors. We take all these factors into account when reducing charges. To qualify for reduced charges, a group or sponsored arrangement must meet certain requirements. We will make any reductions according to our rules in effect when an application form for a Policy is approved. We may change these rules from time to time. Any variation in the sales charge, administrative charge or other charges, fees and privileges will reflect differences in costs or services and will not be unfairly discriminatory. OTHER CHARGES Under current law we pay no tax on investment income and capital gains reflected in variable life insurance policy reserves (except to the extent the Federal deferred acquisition cost may be considered such a tax). Consequently, no charge is currently being made to any Division of our Variable Account for our Federal income taxes. We reserve the right, however, to make such a charge in the future if the tax law changes and we incur ________________________________________________________________________________ 41 Strategic Advantage Federal income tax which is attributable to the Variable Account. We must pay state and local taxes (in addition to applicable taxes based on premiums) in several states. At the presenttime, these taxes are not substantial. However, if these taxes increase, we also reserve the right to make charges for such taxes when they are attributable to our Variable Account. TAX CONSIDERATIONS The following discussion provides a general description of the Federal income tax consequences of the Policy, based on our understanding of the present Federal income tax laws as they are currently interpreted by the Internal Revenue Service ("IRS"). No representation is made as to the likelihood of continuation of the present Federal income tax laws or of the current interpretations by the IRS. This discussion is general in nature, and should not be considered tax advice. Further, it is not intended to present an exhaustive survey of all the tax issues that might arise under the Policy. Because of the complexity of the laws and the fact that tax results will vary according to the particular circumstances of the Owner, a legal or tax adviser should be consulted prior to purchasing the Policy. LIFE INSURANCE DEFINITION Section 7702 of the Internal Revenue Code of 1986, as amended (the "Code"), sets forth the definition of a life insurance contract for Federal tax purposes. The entire death benefit of a life insurance contract is excludable from gross income of the beneficiary under Section 101(a)(1) of the Code. However, there are exceptions to this general rule such as transfers for value and distributions from a policy owned by a qualified plan. The Secretary of the Treasury (the "Treasury") is authorized to prescribe regulations implementing Section 7702. While proposed regulations and other interim guidance has been issued, final regulations have not been adopted. In short, guidance as to how Section 7702 is to be adopted is limited. If a Policy were determined not to be a life insurance contract for purposes of Section 7702, such Policy would not qualify for the favorable tax treatment normally provided to a life insurance policy. Section 7702 provides that if one of two alternate tests are met, a Policy will be treated as a life insurance policy for Federal income tax purposes. These tests are referred to as the "Cash Value Accumulation Test" and the "Guideline Premium/Cash Value Corridor Test." Under the Cash Value Accumulation Test, there is no limit to the amount that may be paid in premiums as long as there is enough death benefit in relation to Account Value at all times. The death benefit at all times must be at least equal to an actuarially determined factor, depending on the Insured's Age, sex and Premium Class at any point in time, times the Account Value. See APPENDIX A, page 166, for a table of the Cash Value Accumulation Test factors. The Guideline Premium/Cash Value Corridor Test provides for a maximum premium in relation to the Death Benefit,and a minimum "corridor" of death benefit in relation to Account Value. In most situations, the death benefit that results from the Guideline Premium/Cash Value Corridor Test will ultimately be less than the amount of death benefit required under the Cash Value Accumulation Test. See APPENDIX B, page 174, for a table of the Guideline Premium/Cash Value Corridor Test factors. This Policy allows the Owner to choose, at the time of application, which of these tests we will always apply to the Policy. A choice of tests is irrevocable. Regardless of which test is chosen, we will at all times assure that the Policy meets the statutory definition which qualifies the Policy as life insurance for Federal income tax purposes. In addition, so long as the Policy remains in force, increases in Account Value as a result of interest or investment experience will not be subject to Federal income tax unless and until there is a distribution from the Policy, such as a Partial Withdrawal or loan. The favorable tax treatment of Section 101(a) will not apply to benefits paid at maturity of the policy (age 100). See Benefits at Maturity, page 29. Also, any interest payment accrued on Death Proceeds paid either as a lump sum or other than in one lump sum may be subject to tax. See Settlement Provisions, page 55. The Federal government has in the past and may in the future consider new legislation or regulations that, if enacted, could change the Federal income tax treatment of life insurance policy income or death benefits. Any such change could have a retroactive effect. Such concerns should be addressed by a legal or tax adviser. DIVERSIFICATION REQUIREMENTS In addition to meeting the tests required under Section 7702, Section 817(h) of the Code requires that the investments of separate accounts such as the Variable Account be adequately diversified. Regulations issued by the Secretary of the Treasury set the standards for measuring the adequacy of this diversification. To be ________________________________________________________________________________ 42 Strategic Advantage adequately diversified, each Division of the Variable Account must meet certain tests. A variable life policy that is not adequately diversified under these regulations would not be treated as life insurance under Section 7702 of the Code. If this were to occur, the Owner would be subject to Federal income tax on the income under the Policy as it is earned. The Portfolios in which the Variable Account invests have provided certain assurances that they will meet the applicable diversification standards. In certain circumstances, owners of variable life insurance contracts may be considered the owners, for Federal income tax purposes, of the assets of the separate account used to support their contracts. In those circumstances, income and gains from the separate account assets would be includable in the variable contract owner's gross income. The IRS has stated in published rulings that a variable contract ownerwill be considered the owner of separate account assets if the contract owner possesses incidents of ownership in those assets, such as the ability to exercise investment control over the assets. The Treasury also announced, in connection with the issuance of temporary regulations concerning diversification, that those regulations "do not provide guidance concerning the circumstances in which investor control of the investments of a segregated asset account may cause the investor (i.e., the policyowner), rather than the insurance company, to be treated as the owner of the assets in the account." This announcement also stated that guidance would be issued by way of regulations or rulings on the "extent to which policyholders may direct their investments to particular subaccounts without being treated as owners of the underlying assets." The ownership rights under the Policy are similar to, but different in certain respects from, those described by the IRS in rulings in which it was determined that policy holders were not owners of separate account assets. For example, the Owner has additional flexibility in allocating premium payments and Policy values. These differences could result in an Owner being treated as the owner of a pro rata portion of the assets of the Variable Account. In addition, Security Life does not know what standards will be set forth, if any, in the regulations or rulings which the Treasury has stated it expects to issue. Security Life therefore reserves the right to modify the Policy as necessary to attempt to prevent an Owner from being considered the owner of a pro rata share of the assets of the Variable Account or to otherwise qualify the Policy for favorable tax treatment. MODIFIED ENDOWMENT CONTRACTS Code Section 7702A establishes a class of life insurance contracts designated as "Modified Endowment Contracts", which applies to Policies entered into or materially changed after June 20, 1988. Due to the Policy's flexibility, classification as a Modified Endowment Contract will depend on the individual circumstances of each Policy. In general, a Policy will be a Modified Endowment Contract if the accumulated premiums paid at any time during the first seven Policy years exceeds the sum of the net level premiums which would have been paid on or before such time if the Policy provided for paid-up future benefits after the payment of seven level annual premiums. The determination of whether a Policy will be a Modified Endowment Contract after a material change generally depends upon the relationship of the death benefit and the Account Value at the time of such change and the additional premiums paid in the seven years following the material change. The rules relating to whether a Policy will be treated as a Modified Endowment Contract are extremely complex and cannot be fully described in the limited confines of thissummary. Therefore, a current or prospective Owner should consult with a competent adviser to determine whether a Policy transaction will cause the Policy to be treated as a Modified Endowment Contract. Security Life will, however, monitor Policies and will attempt to notify an Owner on a timely basis if the Owner's Policy becomes a Modified Endowment Contract. TAX TREATMENT OF PREMIUMS No deduction is allowed for premiums paid on any life insurance policy covering the life of any officer or employee, or of any person financially interested in any business carried on by the taxpayer, when the taxpayer is a beneficiary (directly or indirectly) under such policy. Consult your tax adviser for advice on the availability of deductions. LOANS, LAPSES, SURRENDERS AND WITHDRAWALS IF THE POLICY IS NOT A MODIFIED ENDOWMENT CONTRACT If a Policy is not a Modified Endowment Contract, as long as it remains in force, a loan under the Policy will be treated as indebtedness and no part of the loan will be subject to current Federal income tax. Interest paid (or ________________________________________________________________________________ 43 Strategic Advantage accrued by an accrual basis taxpayer) on the loan may or may not be tax deductible. Consult your tax adviser for advice on the availability of deductions. Any time a Policy is surrendered or lapses, the excess, if any, of the Cash Surrender Value over the Owner's "investment in the Policy" will be subject to Federal income tax as ordinary income. ("investment in the Policy" means (i) the aggregate amount of any premiums or other consideration paid for a Policy, minus (ii) the aggregate amount received under the Policy which is excluded from gross income of the Owner (except that the amount of any loan from, or secured by, a Policy that is a Modified Endowment Contract, to the extent such amount is excluded from gross income, will be disregarded), plus (iii) the amount of any loan from, or secured by a Policy that is a Modified Endowment Contract to the extent that such amount is included in the gross income of the Owner.) It is important to note that for this calculation, if the Policy terminates while a Policy Loan is outstanding, the total amount of the loan and accrued loan interest will be treated as a distribution and could be subject to tax under the above rules. As a result, in certain circumstances this may result in taxable income to the Owner even though the Policy has no Net Cash Surrender Value. Proceeds received on a Withdrawal may or may not be taxable depending on the Owner's particular circumstances. During the first 15 Policy years, the proceeds from a Partial Withdrawal could be subject to Federal income tax to theextent the Cash Surrender Value exceeds investment in the Policy. The portion subject to tax will depend upon the ratio of the death benefit to Account Value under the Policy and the Age of the Insured at the time of the withdrawal. After the first 15 Policy years, the proceeds from a Partial Withdrawal will not be subject to Federal income tax except to the extent such proceeds exceed investment in the Policy. IF THE POLICY IS A MODIFIED ENDOWMENT CONTRACT If a Policy is a Modified Endowment Contract, any pre-death distribution from the Policy will be taxed on an "income-first" basis, similar to the treatment of annuities for individuals. Distributions for this purpose include a surrender, Partial Withdrawal or Policy Loan, including any increase in a loan amount to pay interest on an existing loan or an assignment or a pledge to secure a loan. Any such distributions will be considered taxable income to the Owner to the extent the Account Value exceeds investment in the Policy immediately before the distribution. All Modified Endowment Contracts that are issued by Security Life (and its affiliates) to the same Owner during any calendar year are treated as one Modified Endowment Contract for purposes of determining the amount includable in the gross income under Code Section 72(c). A 10% penalty tax will also apply to the taxable portion of a distribution from a Modified Endowment Contract, unless an exception applies. The penalty tax will not apply to distributions (i) when the taxpayer is at least 59 1/2 years of age, (ii) in the case of a disability (as defined in the Code) or (iii) received as part of a series of substantially equal periodic payments, made at least annually for the life (or life expectancy) of the taxpayer or the joint lives (or joint life expectancies) of the taxpayer and his or her beneficiary. Since these exclusions do not apply to corporations or other business entities, the 10% penalty tax would always apply to these types of owners. If the Policy is surrendered, the excess, if any, of the Cash Surrender Value over investment in the Policy will be subject to Federal income tax and, unless one of the above exceptions applies, the 10% penalty tax. If a Policy was not originally a Modified Endowment Contract but later becomes one, distributions that occur during the Policy year it becomes a Modified Endowment Contract and any subsequent Policy year will be taxed as described in the two preceding paragraphs. In addition, any distributions from the Policy made within two years before it becomes a Modified Endowment Contract will be treated as having been made in anticipation of the change and will be subject to tax in this manner. This means that a distribution made from a Policy that is not a modified endowment could later become taxable as a distribution from a Modified Endowment Contract. The Treasury hasbeen authorized to prescribe rules which would address this issue. ALTERNATIVE MINIMUM TAX For purposes of the alternative minimum tax adjusted current earnings adjustment, special rules apply with respect to life insurance contracts. Under these rules, death benefit proceeds are taken into account, increases in cash value attributable to investment performance are taken into account currently and the distribution tax rules apply in a modified form. SECTION 1035 EXCHANGES Section 1035 of the Internal Revenue Code generally provides that no gain or loss shall be recognized on the exchange of one life insurance policy for another life ________________________________________________________________________________ 44 Strategic Advantage insurance policy or for an endowment or annuity contract. Special rules and procedures apply to Section 1035 transactions. Prospective owners wishing to take advantage of Section 1035 should consult their tax adviser. TAX-EXEMPT POLICY OWNERS Special rules may apply in the case of a Policy owned by a tax-exempt entity. Accordingly, tax-exempt entities should consult with a tax adviser regarding the consequences of purchasing and owning a Policy, including the effect, if any, on the tax-exempt status of the entity and the application of the unrelated business income tax. CHANGES TO COMPLY WITH LAW To assure that the Policy continues to qualify as life insurance under the Code, we reserve the right to decline to accept all or part of any premium payments, to decline to change death benefits, or to decline to make Partial Withdrawals that would cause the Policy to fail to qualify. We may also make changes in the Policy or its Riders, require additional premium payments or make distributions from the Policy to the extent we deem necessary to qualify the Policy as life insurance for tax purposes. Any such change will apply uniformly to all policies that are affected. The Policy Owner will be given advance notice of such changes. The tax law limits the allowable charges for mortality costs and other expenses that may be used in making calculations to determine whether a Policy qualifies as life insurance for Federal income tax purposes. These calculations must be based upon reasonable mortality charges and other charges reasonably expected to be paid. The Treasury has issued proposed regulations on the reasonableness standards for mortality charges. Security Life believes that the charges used for this purpose in the Policy should meet the current requirement for reasonableness. Security Life reserves the right to make modifications to the mortality charges if future regulations contain standards which make modification necessary in order to continue qualification of the Policy aslife insurance for Federal income tax purposes. In addition, assuming that the Policy is not intended by the Owner to be or become a Modified Endowment Contract, we will include an endorsement to the Policy whereby we reserve the right to amend the Policy, including any Rider, to assure that the Policy continues to comply with the seven-pay test for Federal income tax purposes. If at any time the premium paid under the Policy exceeds the seven-pay limit, we reserve the right to remove such excess premium or make any appropriate adjustments to the Policy's Account Value and death benefits. Any death benefit increase will cause an increase in the cost of insurance charges. OTHER The Policies may be used in various arrangements, including qualified plans, nonqualified deferred compensation or salary continuance plans, split dollar insurance plans, executive bonus plans, retiree medical benefit plans and others. The tax consequences of such plans may vary depending on the particular facts and circumstances of each individual arrangement. Therefore, if the Owner is contemplating the use of the Policies in any arrangement the value of which depends in part on its tax consequences, the Owner should be sure to consult a qualified tax adviser regarding the tax attributes of the particular arrangement. We are required to withhold income taxes from any portion of the amounts received by individuals in a taxable transaction, unless an election is made in writing not to have withholding apply. If the election not to have withholding is made, or if the amount withheld is insufficient, income taxes, and possibly penalties, may have to be paid later. Federal estate and gift taxes and state and local inheritance, estate, and other tax consequences of ownership or receipt of Policy benefits depend on the particular jurisdiction and the circumstances of each Owner and Beneficiary. QUALIFIED LEGAL OR TAX ADVISERS SHOULD BE CONSULTED FOR COMPLETE INFORMATION ON FEDERAL, STATE, LOCAL AND OTHER TAX CONSIDERATIONS. ADDITIONAL INFORMATION ABOUT THE POLICY VOTING PRIVILEGES We invest the assets in the Divisions of the Variable Account in shares of the corresponding Portfolios. See Investment Objectives of the Portfolios, page 19. We are the legal owner of the shares held in the Variable Account and, as such, have the right to vote on certain matters. Among other things, we may vote on any matters described in the Fund's current prospectus or requiring a vote by shareholders under the Investment Company Act of 1940. ________________________________________________________________________________ 45 Strategic Advantage Even though we own the shares, to the extent required by the interpretations of the SEC, we give Owners the opportunity to tell us how to vote the number of shares that are attributable to their Policies. We will vote those shares at meetings of Portfolio shareholders according to these instructions. We will also vote any Portfolio shares that are not attributable to the Policies and shares for which instructions from Owners were not received in the same proportion that Owners vote. If the Federal securities laws or regulations or interpretations of them change so that we are permitted to vote shares of a Portfolio in our own right or to restrict Owner voting, we reserve the right to do so. Owners may participate in voting only on matters affecting the Portfolios in which the Owner's assets have been invested. We determine the number of Portfolio shares in each Division that are attributable to a Policy by dividing the Account Value allocated to that Division by the net asset value of one share of the corresponding Portfolio. The number of shares as to which an Owner may give instructions will be determined as of the record date set by the Portfolio's Board for the Portfolio's shareholders meeting. We count fractional shares. Owners having a voting interest will be sent proxy material and a form for giving us voting instructions. All Portfolio shares are entitled to one vote. The votes of all Portfolios are cast together on an aggregate basis, except on matters where the interests of the Portfolios differ. In such cases, voting is on a portfolio-by-portfolio basis. In these cases, the approval of the shareholders in one Portfolio is not needed in order to make a decision in another Portfolio. Examples of matters that would require a portfolio-by-portfolio vote are changes in the fundamental investment policy of a particular Portfolio or approval of an investment advisery agreement. Shareholders in a Portfolio not affected by a particular matter generally would not be entitled to vote on it. The Boards of the Portfolios and Security Life and any other insurance companies participating in the Portfolios are required to monitor events to identify any material conflicts that may arise from the use of the Portfolios for variable life and variable annuity separate accounts. Conflict might arise as a result of changes in state insurance law or Federal income tax law, changes in investment management of any Portfolio, or differences in voting instructions given by owners of variable life insurance policies and variable annuity contracts. Shares of these Portfolios may also be sold to certain qualified pension and retirement plans qualifying under Section 401 of the Code that include cash or deferred arrangements under Section 401(k) of the Code. As a result, there is a possibility that a material conflict may arise between the interests of owners generally or certain classes of owners, and such retirement plans or participants in such retirement plans. If there is a material conflict, we will have an obligation to determine what action should betaken including the removal of the affected Portfolios from eligibility for investment by the Variable Account. We will consider taking other action to protect Owners. However, there could be unavoidable delays or interruptions of operations of the Variable Account that we may be unable to remedy. In certain cases, when required by state insurance regulatory authorities, we may disregard instructions relating to changes in the Portfolio's adviser or the investment policies of the Portfolios. In the event we do disregard voting instructions, we will include a summary of our actions and give our reasons in the next semi-annual report to Owners. Under the Investment Company Act of 1940, certain actions affecting the Variable Account (such as some of those described under Right To Change Operations) may require Owner approval. In that case, each Owner will be entitled to one vote for every $100 of value held in the Divisions of the Variable Account. We will cast votes attributable to amounts in the Divisions of the Variable Account not attributable to Policies in the same proportions as votes cast by Owners. RIGHT TO CHANGE OPERATIONS Subject to state limitations, the Company may from time to time change the investment objective of, or make the following changes to, the Variable Account: (i) Make additional Divisions available. These Divisions will invest in Portfolios we find suitable for the Policy. (ii) Eliminate Divisions from the Variable Account, combine two or more Divisions, or substitute a new Portfolio for the Portfolio in which a Division invests. A substitution may become necessary if, in our judgment, a Portfolio no longer suits the purposes of the Policy. This may also happen due to a change in laws or regulations, or a change in a Portfolio's investment objectives or restrictions, or because the Portfolio is no longer available for investment, or for some other reason, such as a declining asset base. (iii) Transfer assets of the Variable Account, which we determine to be associated with the class of policies to which an Owner's Policy belongs, to another Variable Account. ________________________________________________________________________________ 46 Strategic Advantage (iv) Withdraw the Variable Account from registration under the 1940 Act. (v) Operate the Variable Account as a management investment company under the 1940 Act. (vi) Cause one or more Divisions to invest in a mutual fund other than or in addition to the Portfolios. (vii) Discontinue the sale of Policies and certificates. (viii) Terminate any employer or plan trustee agreement with us pursuant to its terms. (ix) Restrict or eliminate any voting rights as to the Variable Account. (x) Make any changes required by the 1940 Act or the rules or regulations thereunder. No such changes will be made until it becomes effective with the SEC or without any necessary approval of the applicable state insurance departments. Owners will be notified of any changes. If an Owner then wishes to transfer the amount in that Division to another Division of the Variable Account or to the Guaranteed Interest Division, they may do so, without charge, by notifying us. At the same time, changes in Net Premium and deduction allocations may also be made, without charge. REPORTS TO OWNERS We will maintain all records relating to the Variable Account, its Divisions and the Guaranteed Interest Division. At the end of each Policy year we will send a report that shows the Total Policy Death Benefit (Base Death Benefit plus Adjustable Term Insurance Rider Death Benefit, if any), the Account Value, the Policy Loan plus accrued Loan Interest and Net Cash Surrender Value. We will also include information about the Divisions of the Variable Account. The report also shows any transactions involving the Account Value that occurred during the year such as premium allocations, deductions, and any loans or withdrawals in that year. We will also send semi-annual reports to the Owner, which will include financial information on the Portfolios, including a list of the investments held by each Portfolio. Confirmation notices will be sent to the Owner during the year for certain Policy transactions. OTHER GENERAL POLICY PROVISIONS FREE LOOK PERIOD Owners have the right to examine the Policy. If for any reason the Owner is not satisfied with the Policy when issued, the Policy may be returned to us or the Registered Representative within the time limit described below and it will be deemed void as of the Policy Date. A request to cancel this Policy must be postmarked no later than 10 days after it is received, or as otherwise specified by state law. The Policy will be deemed to have been received by the Owner 5 days after it is mailed from our Customer Service Center. If a Policy is canceled under this provision, we will refund an amount equal to the full amount of any premiums paid or as otherwise specified by state law. Insurance coverage ends when the request is sent. Amounts allocated to the Divisions of the Variable Account will be held in the Division investing in the Fidelity VIP Money Market Portfolio until the end of the Free Look Period. At the end of the Free Look Period, this portion of the Account Value will be reallocated according to the most recent premium allocation instructions. THE POLICY This Policy is a contract between the Owner and us. The Policy, including a copy of the original application and any applications for an increase, Riders, endorsements, Schedule pages, and any reinstatement applications make up the entire contract. A copy of any application as well as a new Schedule will be attached or furnished to the Owner for attachment to the Policy at the time of any change in coverage. In the absence of fraud, all statements made in any application will be considered representations and are not warranties. No statement will be used to deny a claim unless it is in an application. All changes or amendments to this Policy made by us must be signed by our president or an officer of the Company and by our secretary or assistant secretary. No other person is authorized to change the terms or conditions of this policy. ________________________________________________________________________________ 52 Strategic Advantage AGE This Policy is issued at the Age stated in the Schedule. This is the Insured's Age nearest birthday, calculated as of the Policy Date. The Age of the Insured at any time is calculated by adding the number of completed Policy years to the Age shown in the Schedule. OWNERSHIP The original Owner is the person named in the application. The Owner can exercise all rights and receive the benefits during the Insured's lifetime before the Maturity Date. This includes the right to change the Owner, Beneficiaries, and methods for the payment of proceeds. All rights of the Owner are subject to the rights of any assignee and any irrevocable Beneficiary. An Owner may name a new Owner by giving us written notice. The effective date of the change to the new Owner will be the date the notice is signed. The change will not affect any payment made or action taken by us before recording the change at our Customer Service Center. A change in ownership may cause recognition of taxable income or gain, if any, to the old owner. BENEFICIARY The Owner names the Beneficiary when applying for the Policy. The primary Beneficiary surviving the Insured will receive any Death Proceeds which become payable. Surviving contingent Beneficiaries are paid Death Proceeds only if no primary Beneficiary has survived the Insured. If more than one Beneficiary survives the Insured, they willshare the Death Proceeds equally, unless the designation provides otherwise. If there is no designated Beneficiary surviving, Death Proceeds will be paid to the Owner or the Owner's estate. The Beneficiary designation will be on file with us or at a location designated by us. A new Beneficiary may be named during the Insured's lifetime. We will pay the proceeds to the most recent Beneficiary designation on file. We will not be subject to multiple payments. COLLATERAL ASSIGNMENT This Policy may be assigned as collateral security by sending written notice to us. Once it is recorded with us, the rights of the Owner and the Beneficiary are subject to the assignment, unless the Beneficiary was designated as an irrevocable Beneficiary prior to the assignment. It is the Owner's responsibility to make sure the assignment is valid. INCONTESTABILITY We can challenge the validity of the insurance Policy if it appears that there have been material misstatements in the application. However, there are limits as to how and when we can challenge the Policy: . We will not contest the statements in the application attached at issue after the Policy has been in effect, during the Insured's lifetime, for two years from the Policy Date or the date specified by state law. . We will not contest the statements in the application for any reinstatement after the reinstatement has been in effect, during the Insured's lifetime, for two years from the effective date of such reinstatement. . We will not contest the statements in the application for any coverage change that increases any benefit with respect to the Insured (such as an increase in Stated Death Benefit) after the change has been in effect, during the Insured's lifetime, for two years from the effective date of such increase. We have the right to rescind this Policy if we issued or reinstated the Policy based on a statement in an application, including a reinstatement application, that was false or misleading. MISSTATEMENTS OF AGE OR SEX If the Age or sex of the Insured has been misstated, the death benefit will be adjusted. The death benefit will be adjusted to the amount which would have been purchased for the Insured's correct Age and sex based on the cost of insurance charges which were deducted from the Account Value on the last Monthly Processing Date prior to the Insured's death or as otherwise required by a state. If unisex cost of insurance rates apply, we will not make an adjustment for a misstatement of sex. SUICIDE If the Insured commits suicide within two years of the Policy Date or date of reinstatement, the death benefit will be limited to the total of all premiums that have been paid to the time of death minus the amount of any outstanding Policy Loan and accrued loan interest and minus any withdrawals, unless otherwise required by law. If the Insured has been changed and the new Insured dies by suicide within two years of the exchange date, the death benefit will be limited to the Net Account Value as of the exchange date, plus the premiums paid since that date, less the sum of any increases in Policy Loan, accrued loan interest and any Withdrawals since the exchange date. If the Insured commits suicide within two ________________________________________________________________________________ 48 Strategic Advantage years after the effective date of an increase in the Stated Death Benefit or the Target Death Benefit that was requested, we will pay the death benefit which was in effect before the increase, plus a refund of the amount of the monthly cost of insurance deductions related to the increased death benefit, unless otherwise required by law. PAYMENT We will pay the Death Proceeds, Net Cash Surrender Value upon surrender, Partial Withdrawals, and loan proceeds within seven days after we receive the information required to process the payment. We will also execute a transfer among Divisions of the Variable Account as of the Valuation Date on or next following our receipt of a request at our Customer Service Center. Transfers from the Guaranteed Interest Division to the Divisions of the Variable Account will be made only within the time periods indicated in this prospectus. See Transfer of Account Values, page 32. We may, however, postpone the processing of any such transactions for any of the following reasons: . When the NYSE is closed for trading; . When trading on the NYSE is restricted by the SEC; . When an emergency exists such that it is not reasonably practical to dispose of securities in the applicable Division of the Variable Account or to determine the value of its assets; or . When a governmental body having jurisdiction over the Variable Account permits such suspension by order. Rules and regulations of the SEC, if any, are applicable and will govern the determination as to whether the above conditions exist. Death Proceeds are determined as of the Valuation Date we receive due proof of death of the Insured. Once we determine this amount, the Death Proceeds will not be affected by subsequent changes in the values of the Divisions of the Variable Account. We will pay interest at the rate declared by us or at any higher rate required by lawfrom the date we determine the amount of the Death Proceeds to the date of payment. Death Proceeds are not subject to deferment. However, we may defer for up to six months payment of any surrender proceeds, withdrawal amounts, or loan amounts from our Guaranteed Interest Division, unless otherwise required by law. We will pay interest at the rate declared by us or at any higher rate required by law from the date we receive a request if we delay payment more than 30 days. NOTIFICATION AND CLAIMS PROCEDURES We must receive in writing any election, designation, change, assignment, or request made. It must be on a form acceptable to us. We are not liable for any action we take before we receive and record the written notice. We may require that the policy be returned for any Policy change or upon its surrender. We, or the Registered Representative, should be informed as soon as possible following an Insured's death while the Policy is in force. Claim procedure instructions will be sent immediately. As due proof of death, we may require proof of Age and a certified copy of a death certificate. We may also require the Beneficiary and the Insured's next of kin to sign authorizations as part of this process. These authorization forms allow us to obtain information about the Insured, including but not limited to medical records of physicians and hospitals used by the Insured. TELEPHONE PRIVILEGES If telephone privileges have been elected in a form required by us, transfers or changes in your Dollar Cost Averaging and Automatic Rebalancing options, or requests for Partial Withdrawals and Policy Loans may be made by telephoning our Customer Service Center. Our Customer Service Center will employ reasonable procedures to confirm that instructions communicated by telephone are genuine. Such procedures may include, among others, requiring some form of personal identification prior to acting upon instructions received by telephone, providing written confirmation of such transactions, and/or tape recording of telephone instructions. A request for telephone privileges authorizes us to record telephone calls. If reasonable procedures are not used in confirming instructions, we may be liable for any losses due to unauthorized or fraudulent instructions. We reserve the right to discontinue this privilege at any time. NON-PARTICIPATING The Policy does not participate in Security Life's surplus earnings. DISTRIBUTION OF THE POLICIES The principal underwriter and distributor for the policies is ING America Equities, a wholly-owned subsidiary of ________________________________________________________________________________ 49 Strategic Advantage Security Life. ING America Equities is registered as a broker-dealer with the SEC and is a member of the NASD. We pay ING America Equities for acting as the principal underwriter under a Distribution Agreement. We sell our Policies through Registered Representatives of other broker-dealers which have entered into selling agreements with us. These Registered Representatives are also licensed by state insurance officials to sell our variable life policies. Each of the broker-dealers we enter into selling agreements with are registered with the SEC and are members of the NASD. Under these selling agreements, we pay a distribution allowance to the other broker-dealers, which in turn pay commissions to the Registered Representative who sells this Policy. During the first Policy year, the distribution allowance may equal an amount up to 15% of the Target Premium paid and 3% of premiums paid in excess of the Target Premium. For Policy years 2 through 5, the allowance may equal an amount up to 10% of Target Premium and 3% of premiums paid in excess of the Target Premium. For subsequent Policy years the distribution allowance may equal 3% of premiums paid. Broker-dealers may also receive annual renewal compensation of up to 0.15% of the Net Account Value beginning in the sixth Policy year. Compensation arrangements may vary among broker-dealers. In addition, we may also pay override payments, expense allowances, bonuses, wholesaler fees, and training allowances. Registered Representatives who meet specified production levels may qualify, under our sales incentive programs, to receive non-cash compensation such as expense-paid trips, expense-paid educational seminars and merchandise. We pay the distribution allowance from our own resources (including any sales charges deducted from premiums). SETTLEMENT PROVISIONS During the Insured's lifetime, the Owner may elect that the Beneficiary receive the Death Proceeds other than in one sum. If this election has not been made, the Beneficiary may do so within 60 days after the Insured's death. The Owner may also elect to take the Net Cash Surrender Value other than in one sum. Payments under these options are not affected by the investment experience of any Division of our Variable Account. Instead, interest accrues pursuant to the options chosen. Payment options will also be subject to our rules at the time of selection. Currently, these alternate payment options are only available if the proceeds applied are $2000 or more and any periodic payment will be at least $20. The following payment options are available: Option I: Payouts for a Designated Period: Payouts will be made in 1, 2, 4 or 12 installments per year as elected for a designated period, which may be 5 to 30 years. The installment dollar amounts will be equal except for any excess interest. The amount of the first monthly payout for each $1,000 of Account Value applied is shown in Settlement Option Table I in the Policy. Option II: Life Income with Payouts Guaranteed for a Designated Period: Payouts will be made in 1, 2, 4 or 12 installments per year throughout the payee's lifetime, or if longer, for a period of 5, 10, 15, or 20 years as elected. The installment dollar amounts will be equal except for any excess interest. The amount of the first monthly payout for each $1,000 of Account Value applied is shown in Settlement Option Table II in the Policy. This option is not available for ages not shown in this Table. Option III: Hold at Interest: Amounts may be left on deposit with us to be paid upon the death of the payee or at any earlier date elected. Interest on any unpaid balance will be at the rate declared by us or at any higher rate required by law. Interest may be accumulated or paid in 1, 2, 4 or 12 installments per year, as elected. Money may not be left on deposit for more than 30 years. Option IV: Payouts of a Designated Amount: Payouts will be made until proceeds, together with interest, which will be at the rate declared by us or at any higher rate required by law, are exhausted. Payouts will be made in 1, 2, 4, or 12 equal installments per year, as elected. Option V: Other: The Owner may ask us to apply the money under any option that we make available at the time the benefit is paid. The Beneficiary or any other person who is entitled to receive payment may name a successor to receive any amount that we would otherwise pay to that person's estate if that person died. The person who is entitled to receive payment may change the successor at any time. ________________________________________________________________________________ 50 Strategic Advantage We must approve any arrangements that involve a payee who is not a natural person (for example, a corporation), or a payee who is a fiduciary. Also, the details of all arrangements will be subject to our rules at the time the arrangements take effect. This includes rules on the minimum amount we will pay under an option, minimum amounts for installment payments, withdrawal or commutation rights (i.e., the rights to receive payments over time, for which we may offer a lump sum payment), thenaming of people who are entitled to receive payment and their successors, and the ways of proving Age and survival. ________________________________________________________________________________ 51 Strategic Advantage ILLUSTRATIONS OF DEATH BENEFITS, ACCOUNT VALUES AND SURRENDER VALUES, AND ACCUMULATED PREMIUMS The following tables illustrate how the key financial elements of the Policy work, specifically, how the death benefits, Account Values and Cash Surrender Values could vary over an extended period of time. In addition, each table compares these values with premiums paid accumulated with interest. The Policies illustrated include the following:
Definition Death of Life Stated Target Smoker Benefit Insurance Death Death Sex Age Status Option Test Benefit Premium Benefit Page - -------------------------------------------------------------------------------- Male 45 Non-Smoker 1 CVAT 300,000 $5,750 300,000 52 Male 45 Non-Smoker 1 CVAT 150,000 $5,750 300,000 54 Male 45 Non-Smoker 1 GP 300,000 $5,750 300,000 56
The tables show how death benefits, Account Values and Cash Surrender Values of a hypothetical Policy could vary over an extended period of time if the Divisions of the Variable Account had constant hypothetical gross annual investment returns of 0%, 6% or 12% over the periods indicated in each table. The values will differ from those shown in the tables if the annual investment returns are not absolutely constant. That is, the death benefits, Account Values and Cash Surrender Values will be different if the returns averaged 0%, 6% or 12% over a period of years but went above or below those figures in individual Policy years. These illustrations assume that no Policy Loan has been taken. The amounts shown would differ if female or unisex rates were used or for a risk classification other than non-smoker standard. The third column of each table shows what would happen if an amount equal to the premiums were invested to earn interest, after taxes, of 5% compounded annually. All premium payments are illustrated as if they were made at the beginning of the year. The amounts shown for death benefits, Account Values and Cash Surrender Values reflect the fact that the net investment return on the Policy is lower than the gross investment return on the Divisions of the Variable Account. This results from the charges levied against the Divisions of the Variable Account (i.e., the mortality and expense risk charge) as well as the premium loads, and administrative charges. The difference between the Account Value and the Cash Surrender Value in the first 2 years is the refund of sales charges. The tables illustrate cost of insurance and expense charges at both our current rates (which are described under described under Cost Of Insurance Charges, page 39) and at the maximum rates we guarantee in the Policies. The amounts shown at the end of each Policy year reflect a daily charge against the Variable Account Divisions. This charge includes the charge against the Variable Account for mortality and expense risks and the effect on each Division's investment experience of the charge to Portfolio assets for investment management and direct expenses. The mortality and expense risk fee is 0.75% annually on a guaranteed basis; illustrations showing current rates reflect a guaranteed persistency refund equivalent to 0.5% of the Account Value annually beginning after the 10th Policy anniversary. The tables also reflect a daily investment advisory fee equivalent to an annual rate of .6886% of the aggregate average daily net assets of the Portfolios. This hypothetical rate is representative of the average maximum investment advisory fee applicable to the Divisions of the Variable Account. Other expenses of the Portfolios are assumed at the rate of .1598% of the average daily net assets of the Portfolio, which is an average of all the Portfolios' other expenses, including interest expenses. This amounts to .8484% of the average daily net assets of an investment division including the investment advisory fee. Actual fees vary by Portfolio and may be subject to agreements by the sponsor to waive or otherwise reimburse each investment Division for operating expenses which exceed certain limits. There can be no assurance that the expense reimbursement arrangements will continue in the future, and any unreimbursed expenses would be reflected in the values included on the tables. The effect of these investment management, direct expenses and mortality and expense risk charges on a 0% gross rate of return would result in a net rate of return of (1.59)%, on 6% it would be 4.36%, and on 12% it would be 10.32%. ________________________________________________________________________________ 52 Strategic Advantage The tables assume the deduction of charges including administrative and sales charges. The tables reflect the fact that we do not currently make any charge against the Variable Account for state or Federal taxes. If such a charge is made in the future, it will take a higher gross rate of return than the rates shown to produce the death benefits, Account Values and Cash Surrender Values shown. We will furnish, upon request, a comparable illustration based on the Age and sex of the proposed Insured, standard Premium Class assumptions and any initial Stated Death Benefit, death benefit option and Scheduled Premiums requested and consistent with the Policy form. If a Policy is purchased, we will deliver an individualized illustration reflecting the Scheduled Premium chosen and the Insured's actual risk class. After issuance we will provide upon request an illustration of future Policy benefits based on both guaranteed and current cost factor assumptions and actual Account Value. ________________________________________________________________________________ 53 PROSPECT: INSURED'S NAME MALE 45 NON-SMOKER PRESENTED BY: SECURITY LIFE STRATEGIC ADVANTAGE VARIABLE UNIVERSAL LIFE STATED DEATH BENEFIT: $ 300000 DEATH BENEFIT OPTION 1 ANNUAL PREMIUM: $5750.00 CASH VALUE ACCUMULATION TEST SUMMARY PAGE ASSUMING GUARANTEED CHARGES Assuming Hypothetical Gross Investment Return of:
----------0.00%----------- ---------12.00%---------- -----------6.00%----------- PREMIUM CASH CASH CASH ACCUMULATED ACCOUNT SURR DEATH ACCOUNT SURR DEATH ACCOUNT SURR DEATH YEAR PREMIUMS AT 5% VALUE VALUE BENEFIT VALUE VALUE BENEFIT VALUE VALUE BENEFIT 1 5750 6037 3782 4070 300000 4310 4597 300000 4046 4333 300000 2 5750 12377 7438 7582 300000 8995 9139 300000 8200 8344 300000 3 5750 19033 10964 10964 300000 14093 14093 300000 12464 12464 300000 4 5750 26022 14657 14357 300000 19645 19645 300000 16840 16840 300000 5 5750 33361 17612 17612 300000 25692 25692 300000 21324 21324 300000 6 5750 41067 21129 21129 300000 32730 32730 300000 26344 26344 300000 7 5750 49157 24485 24485 300000 40409 40409 300000 31485 31485 300000 8 5750 57653 27667 27667 300000 48786 48786 300000 36740 36740 300000 9 5750 66573 30663 30663 300000 57931 57931 300000 42102 42102 300000 10 5750 75939 33455 33455 300000 67917 67917 300000 47562 47562 300000 15 5750 130281 44927 44927 300000 137461 137461 300000 77976 77976 300000 20 5750 199636 48700 48700 300000 222319 222319 395950 111334 111334 300000 25 5750 288152 39032 39032 300000 340851 340851 538203 146677 146677 300000 30 5750 401124 3349 3349 300000 512938 512938 729398 183825 183825 300000 AGE 65 5750 215655 48070 48070 300000 242470 242470 420929 118247 118427 300000
THE EXPENSE CHARGES AND COST OF INSURANCE RATES WILL NEVER BE GREATER THAN THOSE WHICH WERE USED TO CALCULATE THE ABOVE VALUES. THE HYPOTHETICAL GROSS RATES OF RETURN SHOWN ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED AS A REPRESENTATION OF PAST OR FUTURE INVESTMENT RESULTS. ACTUAL INVESTMENT RESULTS MAY BE MORE OR LESS THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF FACTORS, INCLUDING THE INVESTMENT ALLOCATIONS MADE TO THE DIVISIONS OF THE VARIABLE ACCOUNT AND THE GUARANTEED INTEREST DIVISION AND THE INVESTMENT EXPERIENCE OF THE DIVISIONS. NO REPRESENTATION CAN BE MADE THAT THESE HYPOTHETICAL GROSS INVESTMENT RETURNS CAN BE ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME. THE DEATH BENEFIT, ACCOUNT VALUE AND CASH SURRENDER VALUE FOR A POLICY WOULD BE DIFFERENT FROM THOSE SHOWN IF THE ACTUAL GROSS ANNUAL RATES OF RETURN AVERAGED 0.00%, 12.00% AND 6.00% OVER A PERIOD OF YEARS BUT VARIED ABOVE OR BELOW THAT AVERAGE DURING THE PERIOD. THEY WOULD ALSO BE DIFFERENT IF PREMIUMS WERE PAID IN A DIFFERENT FREQUENCY THAN SHOWN. THE ABOVE VALUES ASSUME NO LOANS OR WITHDRAWALS ARE TAKEN. ________________________________________________________________________________ 54 PROSPECT: INSURED'S NAME MALE 45 NON-SMOKER PRESENTED BY: SECURITY LIFE STRATEGIC ADVANTAGE VARIABLE UNIVERSAL LIFE STATED DEATH BENEFIT: $ 300000 DEATH BENEFIT OPTION 1 ANNUAL PREMIUM: $ 5750.00 CASH VALUE ACCUMULATION TEST SUMMARY PAGE ASSUMING CURRENT CHARGES Assuming Hypothetical Gross Investment Return of:
-----------0.00%----------- -----------12.00%----------- -----------6.00%----------- PREMIUM CASH CASH CASH ACCUMULATED ACCOUNT SURR DEATH ACCOUNT SURR DEATH ACCOUNT SURR DEATH YEAR PREMIUMS AT 5% VALUE VALUE BENEFIT VALUE VALUE BENEFIT VALUE VALUE BENEFIT 1 5750 6037 4237 4525 300000 4793 5080 300000 4515 4802 300000 2 5750 12377 8179 8323 300000 9840 9983 300000 8992 9136 300000 3 5750 19033 11869 11869 300000 15212 15212 300000 13473 13473 300000 4 5750 26022 15413 15413 300000 21053 21053 300000 18061 18061 300000 5 5750 33361 18892 18892 300000 27497 27497 300000 22846 22846 300000 6 5750 41067 22708 22708 300000 35052 35052 300000 28258 28258 300000 7 5750 49157 26454 26454 300000 43394 43394 300000 33903 33903 300000 8 5750 57653 30094 30094 300000 52570 52570 300000 39756 39756 300000 9 5750 66573 33611 33611 300000 62655 62655 300000 45809 45809 300000 10 5750 75939 36999 36999 300000 73745 73745 300000 52067 52067 300000 15 5750 130281 52693 52693 300000 151935 151935 309644 88403 88403 300000 20 5750 199636 61753 61753 300000 249622 249622 444577 130294 130294 300000 25 5750 288152 60394 60394 300000 390312 390312 616303 179265 179265 300000 30 5750 401124 39361 39361 300000 598898 598898 851633 236906 236906 AGE 65 5750 215655 62495 62495 300000 273319 273319 474481 139442 139442 300000
THE CURRENT COST OF INSURANCE RATES ARE SUBJECT TO CHANGE. ACCOUNT VALUES WILL VARY FROM THOSE ILLUSTRATED IF ACTUAL RATES DIFFER FROM THOSE ASSUMED. CURRENT MORTALITY CHARGE RATES ARE BASED ON CURRENT MORTALITY EXPERIENCE AND ARE NOT DEPENDENT UPON FUTURE IMPROVEMENTS IN UNDERLYING MORTALITY. THE HYPOTHETICAL GROSS RATES OF RETURN SHOWN ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED AS A REPRESENTATION OF PAST OR FUTURE INVESTMENT RESULTS. ACTUAL INVESTMENT RESULTS AND POLICY CHARGES MAY BE MORE OR LESS THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF FACTORS, INCLUDING THE INVESTMENT ALLOCATIONS MADE TO THE DIVISIONS OF THE VARIABLE ACCOUNT AND THE GUARANTEED INTEREST DIVISION AND THE INVESTMENT EXPERIENCE OF THE DIVISIONS. NO REPRESENTATION CAN BE MADE THAT THESE HYPOTHETICAL GROSS INVESTMENTS RETURNS CAN BE ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME. THE DEATH BENEFIT, ACCOUNT VALUE AND CASH SURRENDER VALUE FOR A POLICY WOULD BE DIFFERENT FROM THOSE SHOWN IF THE ACTUAL GROSS ANNUAL RATES OF RETURN AVERAGED 0.00%, 12.00% AND 6.00% OVER A PERIOD OF YEARS BUT VARIED ABOVE OR BELOW THAT AVERAGE DURING THE PERIOD. THEY WOULD ALSO BE DIFFERENT IF PREMIUMS WERE PAID IN A DIFFERENT FREQUENCY THAN SHOWN. THE ABOVE VALUES ASSUME NO LOANS OR WITHDRAWALS ARE TAKEN. ________________________________________________________________________________ 55 Strategic Advantage PROSPECT: INSURED'S NAME MALE 45 NON-SMOKER PRESENTED BY: SECURITY LIFE STRATEGIC ADVANTAGE VARIABLE UNIVERSAL LIFE STATED DEATH BENEFIT: $ 150000 DEATH BENEFIT OPTION 1 INITIAL ADJUSTABLE TERM RIDER: $ 150000 ANNUAL PREMIUM: $ 5750.00 CASH VALUE ACCUMULATION TEST SUMMARY PAGE ASSUMING GUARANTEED CHARGES Assuming Hypothetical Gross Investment Return of:
---------0.00%--------- ---------12.00%--------- -------6.00%------- PREMIUM CASH CASH CASH ACCUMULATED ACCOUNT SURR DEATH ACCOUNT SURR DEATH ACCOUNT SURR DEATH YEAR PREMIUMS AT 5% VALUE VALUE BENEFIT VALUE VALUE BENEFIT VALUE VALUE BENEFIT 1 5750 6037 3782 4070 300000 4309 4597 300000 4045 4333 300000 2 5750 12377 7437 7581 300000 8994 9138 300000 8199 8343 300000 3 5750 19033 10962 10962 300000 14092 14092 300000 12463 12463 300000 4 5750 26022 14356 14356 300000 19643 19643 300000 16838 16838 300000 5 5750 33361 17610 17610 300000 25689 25689 300000 21322 21322 300000 6 5750 41067 21127 21127 300000 32727 32727 300000 26342 26342 300000 7 5750 49157 24483 24483 300000 40406 40406 300000 31483 31483 300000 8 5750 57653 27665 27665 300000 48783 48783 300000 36737 36737 300000 9 5750 66573 30662 30662 300000 57928 57928 300000 42100 42100 300000 10 5750 75939 33454 33454 300000 67914 67914 300000 47560 47560 300000 15 5750 130281 44941 44941 300000 137465 137465 300000 77990 77990 300000 20 5750 199636 48772 48772 300000 222325 222325 395962 111404 111404 300000 25 5750 288152 39310 39310 300000 340860 340860 538218 146901 146901 300000 30 5750 401124 4319 4319 300000 512952 512952 729418 184421 184421 300000 AGE 65 5750 215655 48166 48166 300000 242477 242477 420940 118337 118337 300000
THE EXPENSE CHARGES AND COST OF INSURANCE RATES WILL NEVER BE GREATER THAN THOSE WHICH WERE USED TO CALCULATE THE ABOVE VALUES. THE HYPOTHETICAL GROSS RATES OF RETURN SHOWN ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED AS A REPRESENTATION OF PAST OR FUTURE INVESTMENT RESULTS. ACTUAL INVESTMENT RESULTS MAY BE MORE OR LESS THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF FACTORS, INCLUDING THE INVESTMENT ALLOCATIONS MADE TO THE DIVISIONS OF THE VARIABLE ACCOUNT AND THE GUARANTEED INTEREST DIVISION AND THE INVESTMENT EXPERIENCE OF THE DIVISIONS. NO REPRESENTATION CAN BE MADE THAT THESE HYPOTHETICAL GROSS INVESTMENT RETURNS CAN BE ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME. THE DEATH BENEFIT, ACCOUNT VALUE AND CASH SURRENDER VALUE FOR A POLICY WOULD BE DIFFERENT FROM THOSE SHOWN IF THE ACTUAL GROSS ANNUAL RATES OF RETURN AVERAGED 0.00%, 12.00% AND 6.00% OVER A PERIOD OF YEARS BUT VARIED ABOVE OR BELOW THAT AVERAGE DURING THE PERIOD. THEY WOULD ALSO BE DIFFERENT IF PREMIUMS WERE PAID IN A DIFFERENT FREQUENCY THAN SHOWN. THE ABOVE VALUES ASSUME NO LOANS OR WITHDRAWALS ARE TAKEN. ________________________________________________________________________________ 56 Strategic Advantage PROSPECT: INSURED'S NAME MALE 45 NON-SMOKER PRESENTED BY: SECURITY LIFE STRATEGIC ADVANTAGE VARIABLE UNIVERSAL LIFE STATED DEATH BENEFIT: $ 150000 DEATH BENEFIT OPTION 1 INITIAL ADJUSTABLE TERM RIDER: $ 150000 ANNUAL PREMIUM: $ 5750.00 CASH VALUE ACCUMULATION TEST SUMMARY PAGE ASSUMING CURRENT CHARGES Assuming Hypothetical Gross Investment Return of:
---------0.00%--------- ---------12.00%--------- -----------6.00%---------- PREMIUM CASH CASH CASH ACCUMULATED ACCOUNT SURR DEATH ACCOUNT SURR DEATH ACCOUNT SURR DEATH YEAR PREMIUMS AT 5% VALUE VALUE BENEFIT VALUE VALUE BENEFIT VALUE VALUE BENEFIT 1 5750 6037 4418 4705 300000 4985 5272 300000 4701 4989 300000 2 5750 12377 8612 8756 300000 10324 10468 300000 9451 9595 300000 3 5750 19033 12613 12613 300000 16084 16084 300000 14279 14279 300000 4 5750 26022 16480 16480 300000 22372 22372 300000 19249 19249 300000 5 5750 33361 20258 20258 300000 29290 29290 300000 24413 24413 300000 6 5750 41067 24353 24353 300000 37353 37353 300000 30204 30204 300000 7 5750 49157 28357 28357 300000 46237 46237 300000 36229 36229 300000 8 5750 57653 32261 32261 300000 56024 56024 300000 42489 42489 300000 9 5750 66573 36051 36051 300000 66789 66789 300000 48982 48982 300000 10 5750 75939 39713 39713 300000 78589 78589 300000 55704 55704 300000 15 5750 130281 56624 56624 300000 160583 160853 327819 94503 94503 300000 20 5750 199636 67326 67326 300000 263814 263814 469853 139437 139437 300000 25 5750 288152 69401 69401 300000 412540 412540 651401 192605 192605 304123 30 5750 401124 55467 55467 300000 633043 633043 900187 252841 252841 359540 AGE 65 5750 215655 68552 68552 300000 288864 288864 501468 149324 149324 300000
THE CURRENT COST OF INSURANCE RATES ARE SUBJECT TO CHANGE. ACCOUNT VALUES WILL VARY FROM THOSE ILLUSTRATED IF ACTUAL RATES DIFFER FROM THOSE ASSUMED. CURRENT MORTALITY CHARGE RATES ARE BASED ON CURRENT MORTALITY EXPERIENCE AND ARE NOT DEPENDENT UPON FUTURE IMPROVEMENTS IN UNDERLYING MORTALITY. THE HYPOTHETICAL GROSS RATES OF RETURN SHOWN ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED AS A REPRESENTATION OF PAST OR FUTURE INVESTMENT RESULTS. ACTUAL INVESTMENT RESULTS AND POLICY CHARGES MAY BE MORE OR LESS THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF FACTORS, INCLUDING THE INVESTMENT ALLOCATIONS MADE TO THE DIVISIONS OF THE VARIABLE ACCOUNT AND THE GUARANTEED INTEREST DIVISION AND THE INVESTMENT EXPERIENCE OF THE DIVISIONS. NO REPRESENTATION CAN BE MADE THAT THESE HYPOTHETICAL GROSS INVESTMENTS RETURNS CAN BE ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME. THE DEATH BENEFIT, ACCOUNT VALUE AND CASH SURRENDER VALUE FOR A POLICY WOULD BE DIFFERENT FROM THOSE SHOWN IF THE ACTUAL GROSS ANNUAL RATES OF RETURN AVERAGED 0.00%. 12.00% AND 6.00% OVER A PERIOD OF YEARS BUT VARIED ABOVE OR BELOW THAT AVERAGE DURING THE PERIOD. THEY WOULD ALSO BE DIFFERENT IF PREMIUMS WERE PAID IN A DIFFERENT FREQUENCY THAN SHOWN. THE ABOVE VALUES ASSUME NO LOANS OR WITHDRAWALS ARE TAKEN. ________________________________________________________________________________ 57 Strategic Advantage PROSPECT: INSURED'S NAME MALE 45 NON-SMOKER PRESENTED BY: SECURITY LIFE STRATEGIC ADVANTAGE VARIABLE UNIVERSAL LIFE STATED DEATH BENEFIT: $ 300000 DEATH BENEFIT OPTION 1 ANNUAL PREMIUM: $ 5750.00 GUIDELINE PREMIUM TEST SUMMARY PAGE ASSUMING GUARANTEED CHARGES Assuming Hypothetical Gross Investment Return of:
---------0.00%--------- ----------12.00%--------- -----------6.00%----------- PREMIUM CASH CASH CASH ACCUMULATED ACCOUNT SURR DEATH ACCOUNT SURR DEATH ACCOUNT SURR DEATH YEAR PREMIUMS AT 5% VALUE VALUE BENEFIT VALUE VALUE BENEFIT VALUE VALUE BENEFIT 1 5750 6037 3783 4070 300000 4310 4597 300000 4046 4333 300000 2 5750 12377 7438 7582 300000 8995 9139 300000 8200 8344 300000 3 5750 19033 10964 10964 300000 14093 14093 300000 12464 12464 300000 4 5750 26022 14357 14357 300000 19645 19645 300000 16840 16840 300000 5 5750 33361 17612 17612 300000 25692 25692 300000 21324 21324 300000 6 5750 41067 21129 21129 300000 32730 32730 300000 26344 26344 300000 7 5750 49157 24485 24485 300000 40409 40409 300000 31485 31485 300000 8 5750 57653 27667 27667 300000 48786 48786 300000 36740 36740 300000 9 5750 66573 30663 30663 300000 57931 57931 300000 42102 42102 300000 10 5750 75939 33455 33455 300000 67917 67917 300000 47562 47562 300000 15 5750 130281 44927 44927 300000 137461 137461 300000 77976 77976 300000 20 5750 199636 48700 48700 300000 255159 255159 311294 111334 111334 300000 25 5750 288152 39032 39032 300000 452503 452503 524903 146677 146677 300000 30 5750 401124 3349 3349 300000 775280 775280 829550 183825 183825 300000 AGE 65 5750 215655 48070 48070 300000 287399 287399 344879 118247 118247 300000
THE EXPENSE CHARGES AND COST OF INSURANCE RATES WILL NEVER BE GREATER THAN THOSE WHICH WERE USED TO CALCULATE THE ABOVE VALUES. THE HYPOTHETICAL GROSS RATES OF RETURN SHOWN ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED AS A REPRESENTATION OF PAST OR FUTURE INVESTMENT RESULTS. ACTUAL INVESTMENT RESULTS MAY BE MORE OR LESS THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF FACTORS, INCLUDING THE INVESTMENT ALLOCATIONS MADE TO THE DIVISIONS OF THE VARIABLE ACCOUNT AND THE GUARANTEED INTEREST DIVISION AND THE INVESTMENT EXPERIENCE OF THE DIVISIONS. NO REPRESENTATION CAN BE MADE THAT THESE HYPOTHETICAL GROSS INVESTMENT RETURNS CAN BE ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME. THE DEATH BENEFIT, ACCOUNT VALUE AND CASH SURRENDER VALUE FOR A POLICY WOULD BE DIFFERENT FROM THOSE SHOWN IF THE ACTUAL GROSS ANNUAL RATES OF RETURN AVERAGED 0.00%, 12.00% AND 6.00% OVER A PERIOD OF YEARS BUT VARIED ABOVE OR BELOW THAT AVERAGE DURING THE PERIOD. THEY WOULD ALSO BE DIFFERENT IF PREMIUMS WERE PAID IN A DIFFERENT FREQUENCY THAN SHOWN. THE ABOVE VALUES ASSUME NO LOANS OR WITHDRAWALS ARE TAKEN. ________________________________________________________________________________ 58 Strategic Advantage PROSPECT: INSURED'S NAME: MALE 45 NON-SMOKER PRESENTED BY: SECURITY LIFE STRATEGIC ADVANTAGE VARIABLE UNIVERSAL LIFE STATED DEATH BENEFIT: $ 300000 DEATH BENEFIT OPTION 1 ANNUAL PREMIUM: $ 5750.00 GUIDELINE PREMIUM TEST SUMMARY PAGE ASSUMING CURRENT CHARGES Assuming Hypothetical Gross Investment Return of:
--------- 0.00%-------- ----------12.00%-------- ----------6.00%---------- PREMIUM CASH CASH CASH ACCUMULATED ACCOUNT SURR DEATH ACCOUNT SURR DEATH ACCOUNT SURR DEATH YEAR PREMIUMS AT 5% VALUE VALUE BENEFIT VALUE VALUE BENEFIT VALUE VALUE BENEFIT 1 5750 6037 4237 4525 300000 4793 5080 300000 4515 4802 300000 2 5750 12377 8179 8323 300000 9840 9983 300000 8992 9136 300000 3 5750 19033 11869 11869 300000 15212 15212 300000 13473 13473 300000 4 5750 26022 15413 15413 300000 21053 21053 300000 18061 18061 300000 5 5750 33361 18892 18892 300000 27497 27497 300000 22846 22846 300000 6 5750 41067 22708 22708 300000 35052 35052 300000 28258 28258 300000 7 5750 49157 26454 26454 300000 43394 43394 300000 33903 33903 300000 8 5750 57653 30094 30094 300000 52570 52570 300000 39756 39756 300000 9 5750 66573 33611 33611 300000 62655 62655 300000 45809 45809 300000 10 5750 75939 36999 36999 300000 73745 73745 300000 52067 52067 300000 15 5750 130281 52693 52693 300000 151945 151945 300000 88403 88403 300000 20 5750 199636 61753 61753 300000 283490 283490 345858 130294 130294 300000 25 5750 288152 60394 60394 300000 501374 501374 581594 179265 179265 300000 30 5750 401124 39361 39361 300000 858704 858704 918814 239810 239810 300000 AGE 65 5750 215655 62495 62495 300000 319000 319000 382800 139442 139442 300000
THE CURRENT COST OF INSURANCE RATES ARE SUBJECT TO CHANGE. ACCOUNT VALUES WILL VARY FROM THOSE ILLUSTRATED IF ACTUAL RATES DIFFER FROM THOSE ASSUMED. CURRENT MORTALITY CHARGE RATES ARE BASED ON CURRENT MORTALITY EXPERIENCE AND ARE NOT DEPENDENT UPON FUTURE IMPROVEMENTS IN UNDERLYING MORTALITY. THE HYPOTHETICAL GROSS RATES OF RETURN SHOWN ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED AS A REPRESENTATION OF PAST OR FUTURE INVESTMENT RESULTS. ACTUAL INVESTMENT RESULTS AND POLICY CHARGES MAY BE MORE OR LESS THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF FACTORS, INCLUDING THE INVESTMENT ALLOCATIONS MADE TO THE DIVISIONS OF THE VARIABLE ACCOUNT AND THE GUARANTEED INTEREST DIVISION AND THE INVESTMENT EXPERIENCE OF THE DIVISIONS. NO REPRESENTATION CAN BE MADE THAT THESE HYPOTHETICAL GROSS INVESTMENTS RETURNS CAN BE ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME. THE DEATH BENEFIT, ACCOUNT VALUE AND CASH SURRENDER VALUE FOR A POLICY WOULD BE DIFFERENT FROM THOSE SHOWN IF THE ACTUAL GROSS ANNUAL RATES OF RETURN AVERAGED 0.00%. 12.00% AND 6.00% OVER A PERIOD OF YEARS BUT VARIED ABOVE OR BELOW THAT AVERAGE DURING THE PERIOD. THEY WOULD ALSO BE DIFFERENT IF PREMIUMS WERE PAID IN A DIFFERENT FREQUENCY THAN SHOWN. THE ABOVE VALUES ASSUME NO LOANS OR WITHDRAWALS ARE TAKEN. ________________________________________________________________________________ 59 Strategic Advantage ADDITIONAL INFORMATION DIRECTORS AND OFFICERS Set forth below is information regarding the directors and principal officers of Security Life of Denver Insurance Company. Security Life's address, and the business address of each person named, except as noted with an asterisk (*), is Security Life Center, 1290 Broadway, Denver, Colorado 80203-5699. The business address of each person denoted with an asterisk (*) is ING North America Insurance Corporation, 5780 Powers Ferry Road, Atlanta, Georgia 30327-4390.
Name and Principal Business and Address Position and Offices with Security Life of Denver - -------------------- ------------------------------------------------- R. Glenn Hilliard* Chairman, & CEO Stephen M. Christopher Director, President and Chief Operating Officer Catherine T. Fitzgerald* Executive Vice President Keith T. Glover* Executive Vice President Thomas F. Conroy Director and President, Reinsurance and Institutional Markets Michael W. Cunningham* Director Linda B. Emory* Director, Vice President and Appointed Actuary John R. Barmeyer Senior Vice President and Chief Legal Officer Wayne D. Bidelman Sr. Vice President - New Business Development Eugene L. Copeland Sr. Vice President and General Counsel, Reinsurance and Institutional Markets Benjamin A. Currier Sr. Vice President, Operations Carol D. Hard Senior Vice President, Variable Sales Philip R. Kruse Senior Vice President, Sales & Marketing James L. Livingston, Jr. Sr. Vice President and Chief Actuary
________________________________________________________________________________ 60 Strategic Advantage
Name and Principal Business and Address Position and Offices with Security Life of Denver - -------------------- ------------------------------------------------- Timothy P. McCarthy Senior Vice President, Marketing Services Jeffery W. Seel* Senior. Vice President and Chief Investment Officer Jess A. Skriletz Senior Vice President, Institutional Markets Louis N. Trapolino Senior Vice President, Marketing and Chief Marketing Officer William D. Tyler Senior Vice President and Chief Information Officer Stephen J. Yarina Senior Vice President, Treasurer and Chief Financial Officer William H. Alexander Vice President and Medical Director Carole A. Baumbush Vice President, Reinsurance Operations Evelyn A. Bentz Vice President, M Financial Sales Daniel S. Clements Vice President and Chief Underwriter Wesley A. Coleman Vice President, Variable Product Sales Linda Elliott Vice President, Systems Development Larry D. Erb Vice President, Information Technology Martha K. Evans Vice President, Variable Operations Deborah B. Holden Vice President, Human Resources Development Richard D. King Vice President and Medical Director Charles Lynn McPherson* Vice President, Business Insurance Operations Sue A. Miskie Vice President, Corporate Services Donna T. Mosely Vice President, Valuation Daniel G. Patsey Vice President, Strategic Technology David S. Pendergrass Vice President and Treasury Officer Christian M. Rutten Vice President, Structured Reinsurance Casey J. Scott Vice President, Agency Sales Alan C. Singer Vice President, Customer Relations and Regulatory Compliance Mark A. Smith Vice President, Insurance Services Jerome M. Strop Vice President, Strategic Marketing Larry D. Taylor Vice President, General Counsel and Secretary Gary W. Waggoner Vice President, General Counsel and Secretary Roger O. Beebe Actuarial Officer Irene M. Colorosa Assistant Secretary Marsha K. Crest Agency Administration Officer John B. Dickinson Actuarial Officer Denise S. Dumont Computer Services Officer Pamela C. Erbes New Market Development Officer Shirley A. Knarr Actuarial Officer
________________________________________________________________________________ Strategic Advantage 61
Name and Principal Business and Address Position and Offices with Security Life of Denver - -------------------- ------------------------------------------------- Lisa K. Smith Denver Operations Management Officer Glen E. Stark Actuarial Officer William J. Wagner Actuarial Officer Amy L. Winsor Finance and Tax Officer
STATE REGULATION We are regulated and supervised by the Division of Insurance of the Department of Regulatory Agencies of the State of Colorado which periodically examines our financial condition and operations. In addition, we are subject to the insurance laws and regulations in every jurisdiction in which we do business. As a result, the provisions of this Policy may vary somewhat from jurisdiction to jurisdiction. We are required to submit annual statements, including financial statements, on our operations and finances to the Insurance Departments of the various jurisdictions in which we do business to determine solvency and compliance with state insurance laws and regulations. We are also subject to various Federal securities laws and regulations. LEGAL MATTERS The legal matters in connection with the Policy described in this prospectus have been passed on by the General Counsel of Security Life. LEGAL PROCEEDINGS Security Life, as an insurance company, is ordinarily involved in litigation. We do not believe that any current litigation is material to Security Life's ability to meet its obligations under the Policy or to the Variable Account, and we do not expect to incur significant losses from such actions. ING America Equities, Inc., the principal underwriter and distributor of the Policy, is not engaged in any litigation of any material nature. EXPERTS The consolidated financial statements of Security Life of Denver Insurance Company and Subsidiaries at December 31, 1996 and 1995, and for each of the three years in the period ended December 31, 1996, and the financial statements of the Separate Account L1 at December 31, 1996, and for each of the two years in the period ended December 31, 1996, appearing in this prospectus and registration statement have been audited by Ernst & Young LLP, independent auditors, as set forth in their reports thereon appearing elsewhere herein and in the registration statement, and are included in reliance upon such reports given upon the authority of such firm as experts in accounting and auditing. Actuarial matters in this prospectus have been examined by Shirley A. Knarr, F.S.A., M.A.A.A., who is the Variable Products Portfolio Manager and Actuarial Officer of Security Life. Her opinion on actuarial matters is filed as an exhibit to the Registration Statement we filed with the SEC. REGISTRATION STATEMENT We have filed a Registration Statement relating to the Variable Account and the variable life insurance policy described in this prospectus with the SEC. The Registration Statement, which is required by the Securities Act of 1933, includes additional information that is not required in this prospectus under the rules and regulations of the SEC. The additional information may be obtained from the SEC's principal office in Washington, DC. You will have to pay a fee for the material. ________________________________________________________________________________ 62 Strategic Advantage FINANCIAL STATEMENTS The consolidated financial statements of Security Life of Denver Insurance Company and Subsidiaries ("Security Life and Subsidiaries") at December 31, 1996 and 1995, and for each of the three years in the period ended December 31, 1996, are prepared in accordance with generally accepted accounting principles and start on page 67. The financial statements included for the Security Life Separate Account L1 at December 31, 1996 and for each of the two years in the period ended December 31, 1996, are prepared in accordance with generally accepted accounting principles and represent those Divisions that had commenced operations by that date. The consolidated financial statements of Security Life and Subsidiaries referred to above have been audited by Ernst & Young LLP. The consolidated financial statements of Security Life and Subsidiaries should be distinguished from the financial statements of the Security Life Separate Account L1 and should be considered only as bearing upon the ability of Security Life and Subsidiaries to meet its obligations under the Policies. They should not be considered as bearing upon the investment experience of the Divisions of Security Life Separate Account L1. ________________________________________________________________________________ 63 Strategic Advantage Security Life of Denver Insurance Company and Subsidiaries Consolidated Financial Statements Security Life of Denver Insurance Company and Subsidiaries Years ended December 31, 1996, 1995 and 1994 with Report of Independent Auditors CONTENTS -------- Report of Independent Auditors....................................... 66 Audited Consolidated Financial Statements Consolidated Balance Sheets.......................................... 67 Consolidated Statements of Income.................................... 69 Consolidated Statements of Stockholder's Equity...................... 70 Consolidated Statements of Cash Flows................................ 71 Notes to Consolidated Financial Statements........................... 73
________________________________________________________________________________ 65 Strategic Advantage Report of Independent Auditors Board of Directors and Stockholder Security Life of Denver Insurance Company We have audited the accompanying consolidated balance sheets of Security Life of Denver Insurance Company (a wholly-owned subsidiary of ING America Insurance Holdings, Inc.) and subsidiaries as of December 31, 1996 and 1995, and the related consolidated statements of income, stockholder's equity, and cash flows for each of the three years in the period ended December 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Security Life of Denver Insurance Company and subsidiaries at December 31, 1996 and 1995, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. ERNST & YOUNG LLP Denver, Colorado April 11, 1997 ________________________________________________________________________________ 66 Strategic Advantage Security Life of Denver Insurance Company and Subsidiaries Consolidated Balance Sheets (Dollars in Thousands)
DECEMBER 31 1996 1995 ----------------------------------- ASSETS Investments (Note 3): Fixed maturities, at fair value (amortized cost: 1996--$2,765,488; 1995--$2,318,038) $2,875,084 $2,470,944 Equity securities, at fair value (cost: 1996--$4,899; 1995--$8,593) 5,345 8,369 Mortgage loans on real estate 452,795 285,544 Investment real estate, at cost, less accumulated depreciation (1996--$628; 1995--$640) 1,769 2,908 Policy loans 795,311 754,240 Other long-term investments 11,063 11,870 Short-term investments 7,019 10,946 ----------------------------------- Total investments 4,148,386 3,544,821 Cash 13,821 32,044 Accrued investment income 45,426 38,132 Reinsurance recoverable: Paid benefits 10,188 11,096 Unpaid benefits 19,703 13,581 Prepaid reinsurance premiums (Note 9) 1,951,012 1,614,959 Deferred policy acquisition costs (DPAC) 673,560 595,232 Property and equipment, at cost, less accumulated depreciation (1996--$21,407; 1995--$19,556) 38,848 40,418 Federal income tax recoverable (Note 10) - 62,990 Indebtedness of related parties 5,383 33,418 Other assets 99,683 64,314 Separate account assets (Note 7) 124,986 31,825 ----------------------------------- Total assets $7,130,996 $6,082,830 ===================================
________________________________________________________________________________ 67 Strategic Advantage
DECEMBER 31 1996 1995 --------------------------------------- LIABILITIES AND STOCKHOLDER'S EQUITY Liabilities: Future policy benefits (Note 9): Life and annuity reserves $3,834,140 $3,328,405 Guaranteed investment contracts 1,911,201 1,520,926 Policyholders' funds 81,273 75,809 Advance premiums 236 231 Accrued dividends and dividends on deposit 20,338 19,886 Unpaid claims 88,074 79,821 Funds held under reinsurance treaties 18,967 32,793 --------------------------------------- Total future policy benefits 5,954,229 5,057,871 Accounts payable and accrued expenses 75,790 75,019 Indebtedness to related parties 5,427 16,224 Long-term debt to related parties (Note 11) 75,000 50,032 Accrued interest on long-term debt to related parties (Note 11) 3,700 24 Other liabilities 53,311 60,443 Federal income taxes payable (Note 10) 11,883 - Deferred federal income taxes (Note 10) 48,541 44,746 Separate account liabilities (Note 7) 124,986 31,825 --------------------------------------- Total liabilities 6,352,867 5,336,184 Commitments and contingent liabilities (Notes 8, 9 and 14) Stockholder's equity (Note 12): Common stock, $20,000 par value: Authorized - 149 shares Issued and outstanding - 144 shares 2,880 2,880 Additional paid-in capital 302,722 297,422 Net unrealized gains on investments 58,718 72,973 Retained earnings 413,809 373,371 --------------------------------------- Total stockholder's equity 778,129 746,646 --------------------------------------- Total liabilities and stockholder's equity $7,130,996 $6,082,830 =============== ===============
See accompanying notes. ________________________________________________________________________________ 68 Strategic Advantage Security Life of Denver Insurance Company and Subsidiaries Consolidated Statements of Income (Dollars in Thousands)
YEAR ENDED DECEMBER 31 1996 1995 1994 --------------------------------------------------- Revenues: Traditional life insurance premiums $ 118,200 $ 124,619 $ 140,633 Universal life and investment product charges 202,081 202,908 164,526 Reinsurance premiums assumed 333,851 321,731 299,632 --------------------------------------------------- 654,132 649,258 604,791 Reinsurance premiums ceded (117,880) (117,061) (101,459) --------------------------------------------------- 536,252 532,197 503,332 Net investment income 312,121 256,065 209,605 Net realized gains (losses) on investments 4,770 6,564 (7,245) Miscellaneous income 526 1,941 6,313 --------------------------------------------------- 853,669 796,767 712,005 Benefits and expenses: Benefits: Traditional life insurance: Death benefits 235,828 217,136 231,018 Other benefits 71,939 88,326 72,298 Universal life and investment contracts: Interest credited to account balances 186,908 164,536 139,942 Death benefits incurred in excess of account balances 54,004 63,672 73,869 Increase in policy reserves and other funds 121,946 23,895 97,723 Reinsurance recoveries (80,276) (74,305) (73,379) Product conversions 16,379 74,291 - --------------------------------------------------- 606,728 557,551 541,471 Expenses: Commissions 20,362 46,605 12,359 Insurance operating expenses 69,580 52,414 50,309 Amortization of deferred policy acquisition costs 94,685 71,450 65,393 --------------------------------------------------- 791,355 728,020 669,532 --------------------------------------------------- Income before federal income taxes 62,314 68,747 42,473 Federal income taxes (Note 10) 21,876 24,296 14,921 --------------------------------------------------- Net income before cumulative effect of accounting changes 40,438 44,451 27,552 Cumulative effect of change in accounting for postemployment benefits (net of tax) (Note 6) - - (1,381) --------------------------------------------------- Net income $ 40,438 $ 44,451 $ 26,171 ===================================================
See accompanying notes. ________________________________________________________________________________ 69 Strategic Advantage Security Life of Denver Insurance Company and Subsidiaries Consolidated Statements of Stockholder's Equity (Dollars in Thousands)
YEAR ENDED DECEMBER 31 1996 1995 1994 ------------------------------------------------ Common stock: Balance at beginning and end of year $ 2,880 $ 2,880 $ 2,880 ================================================ Additional paid-in capital: Balance at beginning of year $297,422 $150,792 $ 150,792 Capital contributions 5,300 146,630 - ------------------------------------------------ Balance at end of year $302,722 $297,422 $ 150,792 ================================================ Net unrealized gains on investments: Balance at beginning of year $ 72,973 $ 6,862 $ (131) Adjustment to beginning balance for change in accounting method, net of income taxes of $46,916 (Note 1) - - 87,630 Effect on DPAC of change in accounting method, net of income taxes of $10,117 - - (18,790) Net change in unrealized gains (losses), net of tax (27,716) 118,654 (106,911) Effect on DPAC of unrealized gains and losses on fixed maturities, net of tax 13,461 (52,543) 45,064 ------------------------------------------------ Balance at end of year $ 58,718 $ 72,973 $ 6,862 ================================================ Retained earnings: Balance at beginning of year $373,371 $329,640 $ 306,349 Net income 40,438 44,451 26,171 Dividends paid to stockholder - (720) (2,880) ------------------------------------------------ Balance at end of year $413,809 $373,371 $ 329,640 ================================================ Total stockholder's equity $778,129 $746,646 $ 490,174 ===============================================
See accompanying notes. ________________________________________________________________________________ 71 Strategic Advantage Security Life of Denver Insurance Company and Subsidiaries Consolidated Statements of Cash Flows (Dollars in Thousands)
YEAR ENDED DECEMBER 31 1996 1995 1994 ------------------------------------------------- OPERATING ACTIVITIES Net income $ 40,438 $ 44,451 $ 26,171 Adjustments to reconcile net income to net cash provided by operating activities: Increase in future policy benefits 585,581 471,331 621,578 Net decrease (increase) in federal income taxes 78,668 33,232 (25,506) Increase (decrease) in accounts payable and accrued expenses (6,845) 26,751 3,771 Increase in accrued interest on long-term debt 3,676 24 - Increase in accrued investment income (7,294) (5,739) (5,651) Increase in reinsurance recoverable (5,214) (24) (1,767) Increase in prepaid reinsurance premiums (336,053) (253,968) (397,463) Net realized investment (gains) losses (4,770) (6,564) 7,245 Depreciation and amortization expense 3,857 4,036 3,500 Policy acquisition costs deferred (152,299) (127,069) (127,305) Amortization of deferred policy acquisition costs 94,685 71,450 65,393 Cumulative effect of accounting changes - 1,381 Increase in accrual for postretirement benefits 484 623 851 Other, net (10,055) (9,784) (4,894) ======================================================= Net cash provided by operating activities 284,859 248,750 167,304 INVESTING ACTIVITIES Securities available-for-sale: Sales: Fixed maturities 334,482 357,059 731,460 Equity securities 4,198 4,730 148,176 Maturities--fixed maturities 727,937 280,581 237,586 Purchases: Fixed maturities (1,522,369) (935,210) (1,202,024) Equity securities (428) (1,300) (130,856) Securities held-to-maturity: Maturities--fixed maturities - 14,156 1,665 Purchases--fixed maturities - - (42,454) Sale, maturity or repayment of investments: Mortgage loans on real estate 18,102 16,061 17,570 Investment real estate 1,354 215 1,534 Other long-term investments - 1,064 -
________________________________________________________________________________ 72 Strategig Advantage Security Life of Denver Insurance Company and Subsidiaries Consolidated Statements of Cash Flows (continued) (Dollars in Thousands)
YEAR ENDED DECEMBER 31 1996 1995 1994 ----------------------------------------------------- INVESTING ACTIVITIES (CONTINUED) Purchase or issuance of investments: Mortgage loans on real estate $(186,228) $(136,218) $ (91,410) Investment real estate - 14 (156) Policy loans, net (41,071) (63,746) (72,017) Other long-term investments 809 (2,169) (399) Short-term investments, net 3,942 (9,154) 4,099 Additions to property and equipment (4,482) (1,812) (2,280) Disposals of property and equipment 2,389 79 (177) ----------------------------------------------------- Net cash used by investing activities (661,365) (475,650) (399,683) FINANCING ACTIVITIES Increase (decrease) in indebtedness to related parties 42,206 (17,011) 52,231 Cash contributions from parent 5,300 - 15,000 Receipts from interest sensitive products credited to policyholder account balances 434,726 387,904 250,396 Return of policyholder account balances on interest sensitive policies (123,949) (128,948) (89,532) Dividends paid to stockholder - (720) (2,880) ----------------------------------------------------- Net cash provided by financing activities 358,283 241,225 225,215 ----------------------------------------------------- Net (decrease) increase in cash (18,223) 14,325 (7,164) Cash at beginning of year 32,044 17,719 24,883 ----------------------------------------------------- Cash at end of year $ 13,821 $ 32,044 $ 17,719 =====================================================
Noncash transaction: In 1995, the Company received a capital contribution of $124,630,000 in fixed maturities and equity securities. The Company's parent also contributed $22,000,000 in cash to additional paid-in capital. As of December 31, 1995, the cash representing the capital contribution had not been received, and the amount is presented as indebtedness of related parties in the accompanying consolidated balance sheet. The cash was received by the Company in January 1996. See accompanying notes. ________________________________________________________________________________ 73 Strategic Advantage Security Life of Denver Insurance Company and Subsidiaries Notes to Consolidated Financial Statements December 31, 1996 1. SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION The accompanying consolidated financial statements include the accounts and operations, after intercompany eliminations, of Security Life of Denver Insurance Company (Security Life) and its wholly-owned subsidiaries: Midwestern United Life Insurance Company (Midwestern United); First ING Life Insurance Company of New York, formerly the Urbaine Life Reinsurance Company (First ING); First Secured Mortgage Deposit Corporation; and ING America Equities, Inc., formerly SLD Equities, Inc. NATURE OF OPERATIONS Security Life of Denver Insurance Company and its subsidiaries (the Company) is a wholly-owned subsidiary of ING America Insurance Holdings, Inc. (ING America). The Company focuses on two markets, the advanced market and reinsurance to other insurers. The life insurance products offered for the advanced market include wealth transfer and estate planning, executive benefits, charitable giving and corporate owned life insurance. These products include traditional life, interest sensitive life, universal life, variable annuity and variable life. Operations are conducted almost entirely on the general agency basis and the Company is presently licensed in all states (approved for reinsurance only in New York), the District of Columbia and the Virgin Islands. In the reinsurance market, the Company focuses on automatic reinsurance coverages provided to other insurance companies. The significant accounting policies followed by the Company that materially affect the financial statements are summarized below: BASIS OF PRESENTATION The accompanying consolidated financial statements have been prepared in accordance with generally accepted accounting principles (GAAP) which, as to the insurance companies included in the consolidation, differ from statutory accounting practices prescribed or permitted by state insurance regulatory authorities. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. ________________________________________________________________________________ 74 Strategic Advantage Security Life of Denver Insurance Company and Subsidiaries Notes to Consolidated Financial Statements (continued) 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) ACCOUNTING CHANGES Effective January 1, 1994, the Company adopted Financial Accounting Standards Board (FASB) Statement No. 112, Employers' Accounting for Postemployment Benefits, in accounting for disability benefits. The cumulative effect as of January 1, 1994 of this change in accounting was to decrease net income by $1,381,000 (net of tax of $743,000). The effect of the change on 1994 income before the cumulative effect of the change was not material. Prior to January 1, 1994, the Company recognized the cost of providing these benefits on a cash basis. Under the new method of accounting, the Company accrues the benefits when it becomes probable that such benefits will be paid and when sufficient information exists to make reasonable estimates of the amounts to be paid. In May 1993, the Financial Accounting Standards Board issued FASB Statement No. 115, Accounting for Certain Investments in Debt and Equity Securities (FASB 115). The Company adopted the provisions of the new standard for investments held as of or acquired after January 1, 1994. The cumulative effect as of January 1, 1994 of adopting FASB 115 had no impact on income. The opening balance of stockholder's equity was increased by $68,840,000 (net of tax of $36,799,000) to reflect the net unrealized holding gains on securities classified as available-for-sale previously carried at amortized cost less an adjustment to deferred policy acquisition costs for the change in expected future gross margins. Because of the numerous questions that arose during the implementation of FASB 115, the Financial Accounting Standards Board issued A Guide to Implementation of Statement 115 on Accounting for Certain Investments in Debt and Equity Securities in November 1995. This Special Report provided interpretive guidance to the implementation of FASB 115 and provided companies with a one-time period until December 31, 1995 to reassess the appropriateness of the classifications of all securities held at the time and account for any resulting reclassifications at fair value. Reclassifications from the held-to-maturity category that result from this one-time reassessment do not call into question the intent of an enterprise to hold other debt securities to maturity in the future. As a result of this reassessment, the Company reclassified all held-to- maturity securities to the available-for-sale category effective December 26, 1995. The book value of these securities at the date of transfer was $98,818,000. At transfer, an unrealized gain of $4,082,000 (net of tax of $2,198,000) was recognized as a direct increase to stockholder's equity. ________________________________________________________________________________ 76 Strategic Advantage Security Life of Denver Insurance Company and Subsidiaries Notes to Consolidated Financial Statements (continued) 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Beginning in 1995, the Company adopted FASB Statement No. 114, Accounting by Creditors for Impairment of a Loan, and Statement No. 118, which amends Statement 114. Under the amended statement, the 1996 and 1995 allowances for credit losses related to loans that are identified for evaluation in accordance with Statement 114 are based on discounted cash flows using the loan's initial effective interest rate or the fair value of the collateral for certain collateral dependent loans. Adoption of this standard resulted in an insignificant impact to net income and stockholder's equity. Effective January 1, 1996, the Company adopted FASB Statement No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, which requires impairment losses to be recorded on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets' carrying amount. Statement 121 also addresses the accounting for long-lived assets that are expected to be disposed of. Adoption of this standard resulted in an insignificant impact to net income and stockholder's equity. INVESTMENTS Investments are presented on the following bases: The carrying value of fixed maturities depends on the classification of the security: securities held-to-maturity, securities available-for-sale, and trading securities. Management determines the appropriate classification of debt securities at the time of purchase and reevaluates such designation as of each balance sheet date. Debt securities not classified as held-to-maturity and marketable equity securities are classified as available-for-sale. Available-for-sale securities are stated at fair value, with the unrealized gains and losses, net of tax and deferred acquisition cost adjustments, reported in a separate component of stockholder's equity. The Company does not hold any securities classified as held-to-maturity or trading securities. The amortized cost of debt securities classified as held-to-maturity or available-for-sale is adjusted for amortization of premiums and accretion of discounts to maturity, or in the case of mortgage-backed securities, over the estimated life of the security. Such amortization is included in interest income from investments. Interest and dividends are included in net investment income as earned. ________________________________________________________________________________ 77 Strategic Advantage Security Life of Denver Insurance Company and Subsidiaries Notes to Consolidated Financial Statements (continued) 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Mortgage loans are carried at the unpaid balances. Investment real estate is carried at cost, less accumulated depreciation. Policy loans are carried at unpaid balances. Short-term investments are carried at cost, which approximates fair value. Derivatives are accounted for on the same basis as the asset hedged. Realized gains and losses, and declines in value judged to be other-than- temporary are included in net realized gains (losses) on investments. The cost of securities sold is based on the specific identification method. RECOGNITION OF PREMIUM REVENUES Premiums for traditional life insurance products, which include those products with fixed and guaranteed premiums and benefits and consist principally of whole life insurance policies, are recognized as revenue when due. Revenues for universal life insurance policies and for investment products consist of policy charges for the cost of insurance, policy administration charges, and surrender charges assessed against policyholder account balances during the year. DEFERRED POLICY ACQUISITION COSTS Commissions, reinsurance allowances, and other costs of acquiring traditional life insurance including reinsurance assumed, universal life insurance (including interest sensitive products) and investment products that vary with and are primarily related to the production of new and renewal business have been deferred. Traditional life insurance acquisition costs are being amortized over the premium-paying period of the related policies using assumptions consistent with those used in computing policy benefit reserves. For universal life insurance and investment products, acquisition costs are being amortized generally in proportion to the present value (using the assumed crediting rate) of expected gross margins from surrender charges, investments, mortality, and expenses. This amortization is adjusted retrospectively when estimates of current or future gross margins to be realized from a group of products are revised. Deferred policy acquisition costs are adjusted to reflect changes that would have been necessary if unrealized investment gains and losses related to available-for-sale securities had been realized. The Company has reflected those adjustments in the asset balance with the offset as a direct adjustment to stockholder's equity. ________________________________________________________________________________ 78 Strategic Advantage Security Life of Denver Insurance Company and Subsidiaries Notes to Consolidated Financial Statements (continued) 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) FUTURE POLICY BENEFITS Benefit reserves for traditional life insurance products (other than reinsurance assumed) are computed using a net level premium method including assumptions as to investment yields, mortality, withdrawals and other assumptions based on the Company's and industry experience, modified as necessary to reflect anticipated trends to include provisions for possible unfavorable deviations. Reserve interest assumptions are those deemed appropriate at the time of policy issue, and range from 2% to 10%. Policy benefit claims are charged to expense in the year that the claims are incurred. Benefit reserves for reinsurance assumed are computed using pricing assumptions with provisions for adverse deviation. Benefits for level-term reinsurance assumed are computed to recognize profits in proportion with premiums. Benefit reserves for all other reinsurance assumed are computed to recognize profits in proportion to the coverage provided. Benefit reserves for universal life-type policies (including interest sensitive products) and investment products are computed under a retrospective deposit method and represent policy account balances before applicable surrender charges. Policy benefits and claims that are charged to expense include benefit claims incurred during the year in excess of related policy account balances. Interest crediting rates for universal life and investment products range from 4.60% to 7.45% during 1996, 4.60% to 8.10% during 1995, and 6.15% to 8.10% during 1994. Included in life and annuity reserves is an unearned revenue reserve that reflects the unamortized balance of excess first year policy service fees over renewal period policy service fees on universal life and investment products. These excess fees have been deferred and are being recognized in income over the periods benefited, using the same assumptions and factors used to amortize deferred policy acquisition costs. UNPAID CLAIMS The liabilities for unpaid claims include estimates of amounts due on reported claims and claims that have been incurred but were not reported as of December 31. Such estimates are based on actuarial projections applied to historical claim payment data and are considered reasonable and adequate to discharge the Company's obligations for claims incurred but unpaid as of December 31. ________________________________________________________________________________ 78 Strategic Advantage Security Life of Denver Insurance Company and Subsidiaries Notes to Consolidated Financial Statements (continued) 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) HOME OFFICE PROPERTY AND EQUIPMENT Home office property and equipment are carried at cost less accumulated depreciation. Depreciation for major classes of assets is calculated on a straight-line basis. PARTICIPATING INSURANCE The Company accrues a liability for earnings on participating policies that cannot inure to the benefit of the Company's stockholder. The liability is determined based on earnings on participating policies in excess of 10% of profits on participating business before payment of policyholder dividends. The liability for these undistributed earnings was $6,211,000 and $6,218,000 at December 31, 1996 and 1995, respectively. Participating business approximates .4% of the Company's ordinary life insurance in force and 1.4% of premium income. Earnings for participating insurance are based on the actual earnings of the participation block of policies. Expenses and taxes are allocated based on the amount of participating insurance in force. Investment income is allocated based on the yield of the participating investment portfolio. The amount of dividends to be paid is determined annually by the Board of Directors. Amounts allocable to participating policyholders are based on published dividend projections or expected dividend scales. Dividends of $3,307,000, $2,964,000, and $3,683,000 were incurred in 1996, 1995, and 1994, respectively. FEDERAL INCOME TAXES Deferred federal income taxes have been provided or credited to reflect significant temporary differences between income reported for tax and financial reporting purposes using reasonable assumptions. CASH FLOW INFORMATION Cash includes cash on hand and demand deposits. Included as a component of operating activities is interest paid of $1,016,000, $4,861,000, and $538,000 for 1996, 1995, and 1994, respectively. ________________________________________________________________________________ 79 Strategic Advantage Security Life of Denver Insurance Company and Subsidiaries Notes to Consolidated Financial Statements (continued) 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) GUARANTY FUND ASSESSMENTS Insurance companies are assessed the costs of funding the insolvencies of other insurance companies by the various state guaranty associations generally based on the amount of premium companies collect in that state. The Company accrues the cost of future guaranty fund assessments based on estimates of insurance company insolvencies provided by the National Organization of Life and Health Insurance Guaranty Associations (NOLHGA) and the amount of premiums written in each state. The Company reduces the accrual by credits allowed in some states to reduce future premium taxes by a portion of assessments in that state. PENDING ACCOUNTING STANDARD During 1996, the FASB issued Statement No. 125, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, which requires an entity to recognize the financial and servicing assets it controls and the liabilities it has incurred and to derecognize financial assets when control has been surrendered in accordance with the criteria provided in the Statement. The Company will apply the new rules prospectively to transactions beginning in the first quarter of 1997. Based on current circumstances, the Company believes the application of the new rules will not have a material impact on the financial statements. RECLASSIFICATIONS Certain amounts in the 1994 and 1995 financial statements have been reclassified to conform to the 1996 presentation. 2. ACQUISITION During 1994, Security Life contributed capital of $317,000 in creation of ING America Equities, Inc., a wholesale broker/dealer incorporated September 27, 1993 and approved for membership in the National Association of Securities Dealers on August 18, 1994. The business of ING America Equities, Inc. consists only of distribution of variable life and annuity contracts. ING America Equities, Inc. does not hold customer funds or securities. ________________________________________________________________________________ 80 Strategic Advantage Security Life of Denver Insurance Company and Subsidiaries Notes to Consolidated Financial Statements (continued) 3. INVESTMENTS The amortized cost and fair value of investments in fixed maturities and equity securities are as follows at December 31, 1996 and 1995:
DECEMBER 31, 1996 ------------------------------------------------ COST OR GROSS GROSS AMORTIZED UNREALIZED UNREALIZED FAIR COST GAINS LOSSES VALUE ------------------------------------------------ (Dollars in Thousands) Available-for-sale: U.S. Treasury securities and obligations of U.S. government corporations and agencies $ 88,526 $ 1,035 $ 858 $ 88,703 States, municipalities and political subdivisions 71,857 984 1,058 71,783 Public utilities securities 105,110 1,130 748 105,492 Debt securities issued by foreign governments 3,272 - - 3,272 Corporate securities 921,565 20,095 5,646 936,014 Mortgage-backed securities 1,273,251 108,367 18,924 1,362,694 Other asset-backed securities 299,809 8,186 1,286 306,709 Derivatives hedging fixed maturities (Note 4) 2,098 292 1,973 417 ------------------------------------------------ Total fixed maturities 2,765,488 140,089 30,493 2,875,084 Preferred stocks (nonredeemable) 2,112 66 301 1,877 Common stocks 2,787 756 75 3,468 ------------------------------------------------ Total $2,770,387 $140,911 $30,869 $2,880,429 ================================================
________________________________________________________________________________ 81 Strategic Advantage Security Life of Denver Insurance Company and Subsidiaries Notes to Consolidated Financial Statements (continued) 3. INVESTMENTS (CONTINUED)
DECEMBER 31, 1995 ------------------------------------------------ COST OR GROSS GROSS AMORTIZED UNREALIZED UNREALIZED FAIR COST GAINS LOSSES VALUE ------------------------------------------------ (Dollars in Thousands) Available-for-sale: U.S. Treasury securities and obligations of U.S. government corporations and agencies $ 99,780 $ 3,503 $ 154 $ 103,129 States, municipalities and political subdivisions 74,126 1,760 234 75,652 Public utilities securities 76,470 2,841 50 79,261 Debt securities issued by foreign governments 3,272 - - 3,272 Corporate securities 659,902 34,246 911 693,237 Mortgage-backed securities 1,230,943 123,306 18,690 1,335,559 Other asset-backed securities 169,847 10,946 2,174 178,619 Derivatives hedging fixed maturities (Note 4) 3,698 909 2,392 2,215 ------------------------------------------------ Total fixed maturities 2,318,038 177,511 24,605 2,470,944 Preferred stocks (nonredeemable) 6,196 275 443 6,028 Common stocks 2,397 13 69 2,341 ------------------------------------------------ Total $2,326,631 $177,799 $25,117 $2,479,313 ================================================
________________________________________________________________________________ 82 Strategic Advantage Security Life of Denver Insurance Company and Subsidiaries Notes to Consolidated Financial Statements (continued) 3. INVESTMENTS (CONTINUED) The amortized cost and fair value of investments in fixed maturities at December 31, 1996, by contractual maturity, are shown in the following table (in thousands). Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
AMORTIZED COST FAIR VALUE ---------------------------- Available for sale: Due in one year or less $ 25,893 $ 26,250 Due after one year through five years 349,962 354,031 Due after five years through ten years 466,457 472,014 Due after ten years 350,116 353,386 1,192,428 1,205,681 Mortgage-backed securities 1,273,251 1,362,694 Other asset-backed securities 299,809 306,709 ---------------------------- Total available-for-sale $2,765,488 $2,875,084 ============================
Changes in unrealized gains (losses) on investments in available-for-sale securities for the years ended December 31, 1996, 1995 and 1994 are summarized as follows (in thousands):
DECEMBER 31, 1996 -------------------------------- FIXED EQUITY TOTAL -------------------------------- Gross unrealized gains $140,089 $ 822 $140,911 Gross unrealized losses 30,493 376 30,869 Net unrealized gains (losses) 109,596 446 110,042 Deferred income tax (expense) benefit (38,359) (157) (38,516) -------------------------------- Net unrealized gains (losses) after taxes 71,237 289 71,526 Less: Balance at beginning of year 99,389 (147) 99,242 -------------------------------- Change in net unrealized gains (losses) $(28,152) $ 436 $(27,716) ================================
________________________________________________________________________________ 83 Strategic Advantage Security Life of Denver Insurance Company and Subsidiaries Notes to Consolidated Financial Statements (continued) 3. INVESTMENTS (CONTINUED)
DECEMBER 31, 1995 -------------------------------- FIXED EQUITY TOTAL -------------------------------- Gross unrealized gains $ 177,511 $ 288 $ 177,799 Gross unrealized losses 24,605 512 25,117 -------------------------------- Net unrealized gains (losses) 152,906 (224) 152,682 Deferred income tax (expense) benefit (53,517) 77 (53,440) -------------------------------- Net unrealized gains (losses) after taxes 99,389 (147) 99,242 Less: Balance at beginning of year (18,854) (558) (19,412) -------------------------------- Change in net unrealized gains (losses) $ 118,243 $ 411 $ 118,654 ================================
DECEMBER 31, 1994 -------------------------------- FIXED EQUITY TOTAL -------------------------------- Gross unrealized gains $ 94,846 $ 262 $ 95,108 Gross unrealized losses 123,843 1,120 124,963 -------------------------------- Net unrealized gains (losses) (28,997) (858) (29,855) Deferred income tax (expense) benefit 10,143 300 10,443 -------------------------------- Net unrealized gains (losses) after taxes (18,854) (558) (19,412) Less: Balance at beginning of year - (131) (131) Adjustment for change in accounting method (net of tax of $46,916) 87,630 - 87,630 -------------------------------- Change in net unrealized gains (losses) $(106,484) $ (427) $(106,911) ================================
As part of its overall investment management strategy, the Company has entered into agreements to purchase $21,538,000 in mortgage loans as of December 31, 1996. These agreements were settled during 1997. The Company had no agreements to sell securities at December 31, 1996. ________________________________________________________________________________ 84 Strategic Advantage Security Life of Denver Insurance Company and Subsidiaries Notes to Consolidated Financial Statements (continued) 3. INVESTMENTS (CONTINUED) Major categories of investment income for the years ended December 31 are summarized as follows (in thousands):
1996 1995 1994 -------------------------------- Fixed maturities $240,931 $190,327 $153,777 Mortgage loans on real estate 29,143 16,601 12,221 Policy loans 52,205 55,438 42,456 Other investments 2,197 4,360 5,654 -------------------------------- 324,476 266,726 214,108 Investment expenses (12,355) (10,661) (4,503) -------------------------------- Net investment income $312,121 $256,065 $209,605 ================================
Net realized gains (losses) on investments for the years ended December 31 are summarized as follows (in thousands):
1996 1995 1994 -------------------------------- Fixed maturities $ 4,540 $ 6,538 $ (3,847) Equity securities 79 5 (1,761) Real estate and other 151 21 (1,637) -------------------------------- Net realized gains (losses) on investments $ 4,770 $ 6,564 $ (7,245) ================================
During 1996, 1995 and 1994, debt and marketable equity securities available-for- sale were sold with fair values at the date of sale of $334,482,000, $306,219,000 and $292,483,000, respectively. Gross gains of $7,248,000, $9,691,000, and $6,125,000 and gross losses of $2,629,000, $3,148,000 and $11,733,000 were realized on those sales in 1996, 1995, and 1994, respectively. At December 31, 1996 and 1995, bonds with an amortized cost of $26,140,000 and $26,730,000, respectively, were on deposit with various state insurance departments to meet regulatory requirements. ________________________________________________________________________________ 85 Strategic Advantage Security Life of Denver Insurance Company and Subsidiaries Notes to Consolidated Financial Statements (continued) 4. DERIVATIVE FINANCIAL INSTRUMENTS HELD FOR PURPOSES OTHER THAN TRADING The Company enters into interest rate contracts, including swaps, caps, floors, and options, to reduce and manage risks which include the risk of a change in the value, yield, price, cash flows, or quantity of, or a degree of exposure with respect to assets, liabilities, or future cash flows which the Company has acquired or incurred. Hedge accounting practices are supported by cash flow matching, scenario testing and duration matching. Interest rate swap agreements generally involve the exchange of fixed and floating interest payments over the life of the agreement without an exchange of the underlying principal amount. Interest rate cap and interest rate floor agreements owned entitle the Company to receive payments to the extent reference interest rates exceed or fall below strike levels in the contracts based on the notional amounts. Premiums paid for the purchase of interest rate contracts are included in other assets and are being amortized to interest expense over the remaining terms of the contracts or in a manner consistent with the financial instruments being hedged. Amounts paid or received, if any, from such contracts are included in interest expense or income. Accrued amounts payable to or receivable from counterparties are included in other liabilities or assets. Gains and losses as a result of early terminations of interest rate contracts are amortized to investment income over the remaining term of the items being hedged to the extent the hedge is considered to be effective; otherwise, they are recognized upon termination. Interest rate contracts that are matched or otherwise designated to be associated with other financial instruments are recorded at fair value if the related financial instruments mature, are sold, or are otherwise terminated or if the interest rate contracts cease to be effective hedges. The Company manages the potential credit exposure from interest rate contracts through careful evaluation of the counterparties' credit standing, collateral agreements, and master netting agreements. The Company is exposed to credit loss in the event of nonperformance by counterparties on interest rate contracts; however, the Company does not anticipate nonperformance by any of these counterparties. The amount of such exposure is generally the unrealized gains in such contacts. ________________________________________________________________________________ 86 Strategic Advantage Security Life of Denver Insurance Company and Subsidiaries Notes to Consolidated Financial Statements (continued) 4. DERIVATIVE FINANCIAL INSTRUMENTS HELD FOR PURPOSES OTHER THAN TRADING (CONTINUED) The table below summarizes the Company's interest rate contracts at December 31, 1996 and 1995 (in thousands):
DECEMBER 31, 1996 ------------------------------------------- NOTIONAL AMORTIZED FAIR BALANCE AMOUNT COST VALUE SHEET ------------------------------------------- Interest rate contracts: Swaps $ 794,520 $ - $(1,452) $(1,452) Swaps-affiliates 774,520 - 1,272 1,272 ------------------------------------------- Total swaps 1,569,040 - (180) (180) Caps owned 400,000 2,073 592 592 Caps owned-affiliates - - - - ------------------------------------------- Total caps owned 400,000 2,073 592 592 Floors owned 100,000 25 5 5 Floors owned-affiliates - - - - ------------------------------------------- Total floors owned 100,000 25 5 5 Options owned 212,000 3,330 3,772 3,772 Options owned-affiliates 212,000 (3,330) (3,772) (3,772) ------------------------------------------- Total options owned 424,000 - - - ------------------------------------------- Total derivatives $2,493,040 $ 2,098 $ 417 $ 417 ===========================================
________________________________________________________________________________ 87 Strategic Advantage Security Life of Denver Insurance Company and Subsidiaries Notes to Consolidated Financial Statements (continued) 4. DERIVATIVE FINANCIAL INSTRUMENTS HELD FOR PURPOSES OTHER THAN TRADING (CONTINUED)
DECEMBER 31, 1995 --------------------------------------------- NOTIONAL AMORTIZED FAIR BALANCE AMOUNT COST VALUE SHEET --------------------------------------------- Interest rate contracts: Swaps $ 884,632 $ 448 $ 4,034 $ 4,034 Swaps-affiliates 864,632 (448) (3,453) (3,453) --------------------------------------------- Total swaps 1,749,264 - 581 581 Caps owned 400,000 3,580 1,308 1,308 Caps owned-affiliates 40,000 61 - - --------------------------------------------- Total caps owned 440,000 3,641 1,308 1,308 Floors owned 100,000 57 326 326 Floors owned-affiliates - - - - --------------------------------------------- Total floors owned 100,000 57 326 326 Options owned 152,000 2,848 2,255 2,255 Options owned-affiliates 152,000 (2,848) (2,255) (2,255) --------------------------------------------- Total options owned 304,000 - - - --------------------------------------------- Total derivatives $2,593,264 $ 3,698 $ 2,215 $ 2,215 =============================================
5. CONCENTRATIONS OF CREDIT RISK At December 31, 1996, the Company held less-than-investment-grade bonds classified as available-for-sale with a carrying value and market value of $74,964,000. These holdings amounted to 3% of the Company's investments in fixed maturity securities and 1% of total assets. The holdings of less-than- investment-grade bonds are widely diversified and of satisfactory quality based on the Company's investment policies and credit standards. At December 31, 1996, the Company's commercial mortgages involved a concentration of properties located in Florida (18%), Texas (13%), and Georgia (10%). The remaining commercial mortgages relate to properties located in 23 other states. The portfolio is well diversified, covering many different types of income-producing properties on which the Company has first mortgage liens. The maximum mortgage outstanding on any individual property is $13,517,000. ________________________________________________________________________________ 88 Strategic Advantage Security Life of Denver Insurance Company and Subsidiaries Notes to Consolidated Financial Statements (continued) 6. EMPLOYEE BENEFIT PLANS PENSION PLAN The Company has a qualified noncontributory defined benefit retirement plan as well as a non-qualified unfunded Supplemental Employees Retirement Plan (SERP) covering substantially all employees. The benefits are based on final average earnings from the time of eligibility for the plan, subject to minimum benefits based on career earnings. The Company's funding policy for the qualified plan is to contribute amounts annually to the plan sufficient to meet the minimum funding requirements set forth in the Employee Retirement Income Security Act of 1974, plus additional amounts as may be determined to be appropriate. The funded status and the amounts recognized in the balance sheets for the defined benefit plan are as follows (in thousands):
DECEMBER 31 ------------------------------------------- 1996 1995 ------------------------------------------- QUALIFIED QUALIFIED PLAN SERP PLAN SERP ------------------------------------------- Actuarial present value of accumulated benefit obligation: Vested $(26,058) $(6,725) $(21,032) $(5,637) Nonvested (733) (132) (1,656) - ------------------------------------------- (26,791) (6,857) (22,688) (5,637) Effect of projected future compensation (5,479) (951) (5,355) (1,297) ------------------------------------------- Projected benefit obligation (32,270) (7,808) (28,043) (6,934) Less plan assets at fair value 33,682 - 31,074 - Plan assets in excess of projected benefit obligation 1,412 (7,808) 3,031 (6,934) Unrecognized net asset (1,316) - (1,601) - Unrecognized prior service benefit cost (97) 236 (109) 267 Unrecognized net loss (gain) 1,930 4,622 998 4,507 ------------------------------------------- Net pension asset (liability) $ 1,929 $(2,950) $ 2,319 $(2,160) ===========================================
As of December 31, 1996 and 1995, the Company recognized an additional liability on the SERP of $3,671,000 and $3,210,000, respectively, as this plan is unfunded and the actuarial present value of accumulated benefit obligation exceeds the net pension liability. ________________________________________________________________________________ 89 Strategic Advantage Security Life of Denver Insurance Company and Subsidiaries Notes to Consolidated Financial Statements (continued) 6. EMPLOYEE BENEFIT PLANS (CONTINUED) The net periodic pension cost for the defined benefit plans includes the following components (in thousands):
1996 1995 1994 ------------------------------------------------------------- QUALIFIED QUALIFIED QUALIFIED PLAN SERP PLAN SERP PLAN SERP ------------------------------------------------------------- Service cost $ 1,320 $ 388 $ 1,147 $ 285 $ 1,369 $248 Interest cost 2,262 463 1,856 517 1,521 219 Return on plan assets (4,075) 258 (3,497) - (1,900) - Net amortization and deferral 883 - 553 239 (659) 200 ------------------------------------------------------------- Net periodic pension expense $ 390 $1,109 $ 59 $1,041 $ 331 $667 =============================================================
Assumptions used in accounting for the defined benefit plans as of December 31, 1996, 1995, and 1994 were as follows:
1996 1995 1994 ------------------------------------------ Weighted-average discount rate 7.50% 7.25% 8.00% Rate of increase in compensation level 4.50% 4.25% 6.00% Expected long-term rate of return on assets 9.50% 9.50% 8.50%
Plan assets of the defined benefit plans at December 31, 1996 are invested primarily in U.S. government securities, corporate bonds, mutual funds, mortgage loans and money market funds. 401(K) PLAN The Security Life of Denver Insurance Company Savings Incentive Plan (the Savings Plan) is a defined contribution-individual account plan which is available to substantially all full-time home office employees to provide a savings program for additional retirement benefits, qualifying as a 401(k) plan. As a 401(k) plan, participants may make contributions to the plan through salary reductions up to a maximum of $9,500 in 1996 and $9,240 in 1995 and 1994. Such contributions are not currently taxable to the participants. The Company matches 100% of the first 3% of participants' contributions, plus 50% of contributions which exceed 3% of participants' compensation, subject to a ________________________________________________________________________________ 90 Strategic Advantage Security Life of Denver Insurance Company and Subsidiaries Notes to Consolidated Financial Statements (continued) 6. EMPLOYEE BENEFIT PLANS (CONTINUED) maximum matching percentage of 4 1/2% of the individual's salary. Company matching contributions were $1,143,000 for 1996, $1,071,000 for 1995, and $1,042,000 for 1994. Plan assets of the Savings Plan at December 31, 1996 are invested in a group deposit administration contract (the Contract) with the Company, various mutual funds maintained by the Principal Financial Group, and loans to participants. The Contract is a policyholder liability of the Company and had a balance of $25.5 million and $23.9 million at December 31, 1996 and 1995, respectively. POSTRETIREMENT BENEFITS In addition to providing pension and profit sharing plans, the Company provides certain health care and life insurance benefits for retired employees. Under the current plans, all employees become eligible for these benefits if they achieve a minimum of 120 months of service prior to retirement. The plans are contributory, with retiree contributions adjusted annually, and contain other cost-sharing features such as deductible amounts and coinsurance. The following table presents the amounts recognized in the Company's balance sheets (in thousands):
DECEMBER 31 1996 1995 ------------------------------------------------------------------- LIFE LIFE MEDICAL INSURANCE MEDICAL INSURANCE PLAN PLAN TOTAL PLAN PLAN TOTAL ------------------------------------------------------------------- Accumulated postretirement benefit obligation: Retirees $(1,315) $(1,226) $ (2,541) $(1,234) $(1,140) $ (2,374) Fully eligible active plan participants (409) (392) (801) (383) (364) (747) Other active plan participants (2,038) (1,220) (3,258) (1,913) (1,134) (3,047) ------------------------------------------------------------------- (3,762) (2,838) (6,600) (3,530) (2,638) (6,168) Plan assets at fair value - - - - - - ------------------------------------------------------------------- Accumulated postretirement benefit obligation in excess of plan assets (3,762) (2,838) (6,600) (3,530) (2,638) (6,168) Unrecognized prior service cost 355 32 387 463 42 505 Unrecognized net gains (losses) (5,870) 1,271 (4,599) (6,114) 1,449 (4,665) ------------------------------------------------------------------- Accrued postretirement benefit cost $(9,277) $(1,535) $(10,812) $(9,181) $(1,147) $(10,328) ===================================================================
________________________________________________________________________________ 91 Strategic Advantage Security Life of Denver Insurance Company and Subsidiaries Notes to Consolidated Financial Statements (continued) 6. EMPLOYEE BENEFIT PLANS (CONTINUED) Net periodic postretirement benefit cost for 1996, 1995, and 1994 includes the following components (in thousands):
1996 1995 1994 ----------------------------------------------------------------------------------------- LIFE LIFE LIFE MEDICAL INSURANCE MEDICAL INSURANCE MEDICAL INSURANCE PLAN PLAN TOTAL PLAN PLAN TOTAL PLAN PLAN TOTAL ------------------------------------------------------------------------------------------ Service cost $ 236 $151 $ 387 $ 359 $175 $ 534 $436 $30 $ 466 Interest cost 268 200 468 291 112 403 448 39 487 Net amortization and deferral (275) 89 (186) (209) 65 (144) (93) (8) (101) Net periodic postretirement benefit cost $ 229 $440 $ 669 $ 441 $352 $ 793 $791 $61 $ 852 ==========================================================================================
The annual assumed rate of increase in the per capita cost of covered benefits (i.e., health care cost trend rate) for the medical plan is 11.25% graded to 5% over 12.5 years. The health care cost trend rate assumption has a significant effect on the amounts reported. For example, increasing the assumed health care cost trend rates by one percentage point in each year would increase the accumulated postretirement benefit obligation for the medical plan as of December 31, 1996 by $656,000 and the aggregate of the service and interest cost components of net periodic postretirement benefit cost for 1996 by $81,000. The weighted-average discount rate used in determining the accumulated postretirement benefit obligation was 7.50% at December 31, 1996 and 7.25% at December 31, 1995. 7. SEPARATE ACCOUNTS Separate account assets and liabilities represent funds segregated by the Company for the benefit of certain policyholders who bear the investment risk. The separate account assets and liabilities are carried at fair value. Revenues and expenses on the separate account assets and related liabilities equal the benefits paid to the separate account policyholders and are excluded from the amounts reported in the Consolidated Statements of Income except for fees charged for administration services and mortality risk. ________________________________________________________________________________ 92 Strategic Advantage Security Life of Denver Insurance Company and Subsidiaries Notes to Consolidated Financial Statements (continued) 8. LEASES The Company is committed under various noncancellable long-term operating leases relating to electronic data processing equipment that provide for annual rentals as follows (in thousands):
1997 $2,985 1998 2,278 1999 35 2000 - 2001 - ----------- $5,298 ===========
These leases expire between 1997 and 2000. Rental expense for all equipment leases was approximately $6,151,000, $4,344,000, and $5,620,000 for the years ended December 31, 1996, 1995, and 1994, respectively. 9. REINSURANCE The Company is involved in both ceded and assumed reinsurance with other companies for the purpose of diversifying risk and limiting exposure on larger risks. As of December 31, 1996, the Company's retention limit for acceptance of risk on life insurance policies had been set at various levels up to $1,500,000. Reinsurance premiums, commissions, and expense reimbursements related to reinsured business are accounted for on bases consistent with those used in accounting for the original policies issued and the terms of the reinsurance contracts. Reserves are based on the terms of the reinsurance contracts, and are consistent with the risks assumed. ________________________________________________________________________________ 93 Strategic Advantage Security Life of Denver Insurance Company and Subsidiaries Notes to Consolidated Financial Statements (continued) 9. REINSURANCE (CONTINUED) To the extent that the assuming companies become unable to meet their obligations under these treaties, the Company remains contingently liable to its policyholders for the portion reinsured. Consequently, allowances are established for amounts deemed uncollectible. To minimize its exposure to significant losses from reinsurer insolvencies, the Company evaluates the financial condition of the reinsurers and monitors concentrations of credit risk arising from similar geographic regions, activities, or economic characteristics of the reinsurers. The Company assumes and cedes, on a coinsurance basis, guaranteed investment contracts (GICs) to and from affiliates under common ownership. In 1995, the Company ceded a block of GIC business issued in prior years to an affiliate. No gain or loss was recognized on the transaction. The Company does not hold any collateral under these agreements. These transactions are summarized as follows (in thousands):
1996 1995 --------------------------------------------------- PREMIUMS RESERVES PREMIUMS RESERVES --------------------------------------------------- Direct (nonaffiliated) $ 767,312 $ 1,785,689 $ 556,571 $ 1,380,951 Assumed from Life Insurance Company of Georgia 50,000 125,512 25,000 128,137 Assumed from Southland Life Insurance Company - - 8,000 11,838 Ceded to Columbine Life Insurance Company (484,512) (1,425,545) (530,291) (1,328,950) Ceded to Life Insurance Company of Georgia (282,800) (435,586) (78,200) (191,976) --------------------------------------------------- Net $ 50,000 $ 50,070 $ (18,920) $ - ===================================================
Ceded GIC reserves totaling $1,861 and $1,521 million as of December 31, 1996 and 1995, respectively, are classified as part of prepaid reinsurance premiums. GIC reserves are reflected at their gross value of $1,911 and $1,521 million as of December 31, 1996 and 1995. ________________________________________________________________________________ 94 Strategic Advantage Security Life of Denver Insurance Company and Subsidiaries Notes to Consolidated Financial Statements (continued) 9. REINSURANCE (CONTINUED) As of December 31, 1996 and 1995, the Company has ceded blocks of insurance under reinsurance treaties to provide funds for financial and other purposes. These reinsurance transactions, generally known as "surplus relief reinsurance," represent financial arrangements and, in accordance with generally accepted accounting principles, are not reflected in the accompanying financial statements except for the risk fees paid to or received from reinsurers. Surplus relief reinsurance has the effect of increasing current statutory surplus while reducing future statutory surplus as amounts are recaptured from reinsurers. During 1995, most of the agreements were recaptured as part of an overall capital restructuring plan. This capital restructuring also resulted in a capital contribution from the Company's parent of $146,630,000 to replace the reduction in statutory surplus that resulted from the recapture. 10. INCOME TAXES The Company files a consolidated federal income tax return with its parent and other U.S. affiliates and subsidiaries, with the exception of First ING. The affiliated companies that join in the filing of the consolidated federal income tax return have an agreement for the allocation of taxes between members that join in the consolidated return. The agreement specifies that the separate return payable or the separate return receivable of each member will be the federal income tax liability or receivable that the member would have had for the period had it filed a separate return. ________________________________________________________________________________ 95 Strategic Advantage Security Life of Denver Insurance Company and Subsidiaries Notes to Consolidated Financial Statements (continued) 10. INCOME TAXES (CONTINUED) Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred tax assets and liabilities are as follows (in thousands):
DECEMBER 31 ----------------------- 1996 1995 Deferred tax liabilities: Deferred policy acquisition costs $(236,445) $(197,355) Unrealized gains/losses (38,516) (53,440) Total deferred tax liabilities (274,961) (250,795) Deferred tax assets: Benefit reserves and surplus relief 123,410 120,439 Tax-basis deferred acquisition costs 60,727 48,945 Investment income 11,037 12,060 Unearned investment income 8,705 9,383 Nonqualified deferred compensation 10,649 8,785 Postretirement employee benefits 3,784 3,615 Other, net 8,108 2,822 ----------------------- Net deferred tax assets 226,420 206,049 ----------------------- Net deferred tax (liabilities) assets $ (48,541) $ (44,746) =======================
The components of federal income tax expense consist of the following (in thousands):
DECEMBER 31 1996 1995 1994 -------------------------------- Current $10,340 $ (48,136) $ 44,121 Deferred 11,536 72,870 (29,200) Current year change in valuation allowance - (438) - -------------------------------- Federal income tax expense $21,876 $ 24,296 $ 14,921 ================================
________________________________________________________________________________ 96 Strategic Advantage Security Life of Denver Insurance Company and Subsidiaries Notes to Consolidated Financial Statements (continued) 10. INCOME TAXES (CONTINUED) The Company's effective income tax rate did not vary significantly from the statutory federal income tax rate. Prior to 1995 a valuation allowance had been established by the Company to account for the fact that the full benefit of the deferred tax asset established by First ING for tax-basis deferred acquisition costs more than likely would not be fully realized. In 1995, a change in judgment about the realization of the deferred tax asset occurred and the valuation allowance was removed. The Company had net income tax payments (receipts) of $(61,467,000) during 1996, $25,875,000 during 1995, and $41,278,000 during 1994 for current income tax payments and settlements of prior year returns. The Policyholder's Surplus Account is an accumulation of certain special deductions for income tax purposes and a portion of the "gains from operations" which were not subject to current taxation under the Life Insurance Tax Act of 1959. At December 31, 1984, the balance in this account for tax return purposes was approximately $70,800,000. The Tax Reform Act of 1984 provides that no further accumulations will be made in this account. If amounts accumulated in the Policyholder's Surplus Account exceed certain limits, or if distributions to the shareholder exceed amounts in the Shareholder's Surplus Account, to the extent of such excess amount or excess distributions, as determined for income tax purposes, amounts in the Policyholder's Surplus Account would become subject to income tax at rates in effect at that time. Should this occur, the maximum tax which would be paid at the current tax rate is $24,780,000. The Company does not anticipate any such action or foresee any events which would result in such tax; accordingly, a deferred tax liability has not been established. 11. LONG-TERM DEBT Long-term indebtedness to related parties for $75,000,000 represents the cumulative cash draws on a $100,000,000 commitment from ING America Insurance Holdings, Inc. through December 31, 1996. Additional draws may be made by the Company at its option through December 1, 2004. This subordinated note bears interest at a variable rate equal to the prevailing rate for 10 year U.S. Treasury Bonds plus 1/4% adjusted annually. ________________________________________________________________________________ 97 Strategic Advantage Security Life of Denver Insurance Company and Subsidiaries Notes to Consolidated Financial Statements (continued) 11. LONG-TERM DEBT (CONTINUED) The repayment of this note requires approval of the Commissioner of Insurance of the State of Colorado and is payable only out of surplus funds of the Company and only at such time as the surplus of the Company, after payment is made, does not fall below the prescribed level. The principal and interest is scheduled to be repaid in five annual installments beginning December 31, 1999 and continuing through December 31, 2003, with the option of prepaying any outstanding principal and accrued interest. As of December 31, 1996, the Company accrued interest of $3,700,000. No payments of principal or interest were made in 1996. Future minimum payments, assuming a current effective interest rate of 6.55%, are as follows (in thousands):
TOTAL YEAR PAYMENTS ----------------------------------------- 1999 $ 21,518 2000 21,518 Subsequent years 64,552 ---------- Total 107,588 Less imputed interest (32,588) ---------- Present value of payments $ 75,000 ==========
12. STATUTORY ACCOUNTING INFORMATION AND PRACTICES Security Life and its insurance subsidiaries prepare their statutory basis financial statements in accordance with accounting practices prescribed or permitted by their state of domicile. "Prescribed" statutory accounting practices include state laws, regulations and general administrative rules, as well as a variety of publications of the National Association of Insurance Commissioners (NAIC). "Permitted" statutory accounting practices encompass all accounting practices that are not prescribed; such practices may differ from state to state, from company to company within the state, and may change in the future. The NAIC is currently in the process of codifying statutory accounting practices, the result of which is expected to constitute the only source of "prescribed" statutory accounting practices. Accordingly, that project, which is expected to be completed in 1998, will likely change, to some extent, prescribed statutory accounting ________________________________________________________________________________ 98 Strategic Advantage Security Life of Denver Insurance Company and Subsidiaries Notes to Consolidated Financial Statements (continued) 12. STATUTORY ACCOUNTING INFORMATION AND PRACTICES (CONTINUED) practices, and may result in changes to the accounting practices that insurance companies use to prepare their statutory financial statements. Prescribed statutory reserve methodology does not fully encompass universal life-type products. The NAIC, however, has promulgated a Model Regulation regarding Universal Life Reserves. The Colorado Division of Insurance has not adopted the regulation, but requires that reserves be held which are at least as great as those required by Colorado Statutes. The NAIC UL Model Regulation is used by the Company to provide reserves consistent with the principles of this article. Because the reserves satisfy the requirements prescribed by the State of Colorado for the valuation of universal life insurance, the Company is permitted to compute reserves in accordance with this model regulation. The NAIC prescribes Risk-Based Capital (RBC) requirements for life/health insurance companies. At December 31, 1996, the Company exceeded all minimum RBC requirements. Combined capital and surplus, determined in accordance with statutory accounting practices (SAP), was $366,451,000 and $333,686,000 at December 31, 1996 and 1995, respectively. Combined net income, determined in accordance with SAP, was $9,141,000, $11,771,000, and $9,383,000 for the years ended December 31, 1996, 1995, and 1994, respectively. Security Life is required to maintain a minimum total statutory capital and surplus in the state of domicile of $1,500,000. Midwestern United is required to maintain minimum statutory capital of $200,000 and surplus of $250,000 in the state of domicile. First ING is required to maintain minimum statutory capital of $1,000,000 and paid-in surplus of at least 50% of paid-in capital in the state of domicile. Each Company exceeded its respective minimum statutory capital and surplus requirements at December 31, 1996. Additionally, the amount of dividends which can be paid by each company to its stockholder without prior approval of the various state insurance departments is generally limited to the greater of 10% of statutory surplus or the statutory net gain from operations. 13. FAIR VALUES OF FINANCIAL INSTRUMENTS In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. In that regard, the derived fair value ________________________________________________________________________________ 99 Strategic Advantage Security Life of Denver Insurance Company and Subsidiaries Notes to Consolidated Financial Statements (continued) 13. FAIR VALUES OF FINANCIAL INSTRUMENTS (CONTINUED) estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instruments. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company. Life insurance liabilities that contain mortality risk and all nonfinancial instruments are excluded from disclosure requirements. However, the fair values of liabilities under all insurance contracts are taken into consideration in the Company's overall management of interest rate risk, such that the Company's exposure to changing interest rates is minimized through the matching of investment maturities with amounts due under insurance contracts. The carrying amounts and fair values of the Company's financial instruments at December 31, 1996 and 1995 are summarized below (in thousands):
DECEMBER 31, 1996 DECEMBER 31, 1995 ------------------------ -------------------------- CARRYING CARRYING AMOUNT FAIR VALUE AMOUNT FAIR VALUE ------------------------ -------------------------- ASSETS Fixed maturities (Note 3) $2,875,084 $2,875,084 $2,470,944 $2,470,944 Equity securities (Note 3) 5,345 5,345 8,369 8,369 Commercial mortgages 445,073 461,777 276,552 304,442 Residential mortgages 7,722 7,589 8,992 9,172 Policy loans 795,311 795,311 754,240 754,240 Short-term investments 7,019 7,019 10,946 10,946 LIABILITIES Guaranteed investment contracts, net of reinsurance $ 50,070 $ 50,070 $ - $ - Supplemental contracts without life contingencies 3,023 3,023 3,033 3,033 Other policyholder funds left on deposit 98,824 98,824 92,893 92,893 Individual and group annuities, net of reinsurance 45,576 45,228 49,020 48,457
________________________________________________________________________________ 100 Strategic Advantage Security Life of Denver Insurance Company and Subsidiaries Notes to Consolidated Financial Statements (continued) 13. FAIR VALUES OF FINANCIAL INSTRUMENTS (CONTINUED) The carrying values of all other financial instruments approximate their fair value. The following methods and assumptions were used by the Company in estimating the "fair value" disclosures for financial instruments: FIXED MATURITIES AND EQUITY SECURITIES: The fair values for fixed -------------------------------------- maturities (including redeemable preferred stocks) are based on quoted market prices, where available. For fixed maturities not actively traded, fair values are estimated using values obtained from independent pricing services or, in the case of private placements and collateralized mortgage obligations and other mortgage derivative investments, are estimated by discounting expected future cash flows. The discount rates used vary as a function of factors such as yield, credit quality and maturity which fall within a range between 2% - 12% over the total portfolio. The fair values of equity securities are based on quoted market prices. MORTGAGE LOANS: Estimated market values for commercial real estate loans -------------- are generated using a discounted cash flow approach. Loans in good standing are discounted using interest rates determined by U.S. Treasury yields on December 31 and spreads implied by independent published surveys. The same is applied on new loans with similar characteristics. The amortizing features of all loans are incorporated in the valuation. Where data on option features is available, option values are determined using a binomial valuation method, and are incorporated into the mortgage valuation. Restructured loans are valued in the same manner; however, these are discounted at a greater spread to reflect increased risk. All residential loans are valued at their outstanding principal balances, which approximate their fair values. POLICY LOANS: The carrying amounts reported in the balance sheets for these ------------ financial instruments approximate their fair values. DERIVATIVE FINANCIAL INSTRUMENTS: Fair values for on-balance-sheet -------------------------------- derivative financial instruments (caps and floors) and off-balance-sheet derivative financial instruments (swaps) are based on broker/dealer valuations or on internal discounted cash flow pricing models taking into account current cash flow assumptions and the counterparties' credit standing. ________________________________________________________________________________ 101 Strategic Advantage Security Life of Denver Insurance Company and Subsidiaries Notes to Consolidated Financial Statements (continued) 13. FAIR VALUES OF FINANCIAL INSTRUMENTS (CONTINUED) GUARANTEED INVESTMENT CONTRACTS: The fair values of the Company's guaranteed ------------------------------- investment contracts are estimated using discounted cash flow calculations, based on interest rates currently being offered for similar contracts with maturities consistent with those remaining for the contracts being valued. OTHER INVESTMENT-TYPE INSURANCE CONTRACTS: The fair values of the Company's ----------------------------------------- deferred annuity contracts are estimated based on the cash surrender value. The carrying values of other liabilities, including immediate annuities, dividend accumulations, supplementary contracts without life contingencies and premium deposits, approximate their fair values. OFF-BALANCE-SHEET INSTRUMENTS: The Company had synthetic guaranteed ----------------------------- investment contract sales in the amounts of $55,780,000 and $10,358,000 in 1996 and 1995, respectively, to trustees of 401(k) plans. Pursuant to the terms of these contracts, the trustees own and retain the assets related to these contracts. Such assets had a value of $637,151,000 and $695,288,000 at December 31, 1996 and 1995, respectively. Under synthetic guaranteed investment contracts, the synthetic issuer may assume interest rate risk on individual plan participant initiated withdrawals from stable value options of 401(k) plans. Approximately 85% of the synthetic guaranteed investment contract book values are on a participating basis and have a credited interest rate reset mechanism which passes such interest rate risk to plan participants. LETTERS OF CREDIT ----------------- The Company is the beneficiary of letters of credit totaling $93,252,000 which have a market value to the Company of $0 and two lines of credit totaling $205,274,000 which have a market value to the Company of $0 (see Note 15). 14. COMMITMENTS AND CONTINGENT LIABILITIES The Company is a party to pending or threatened lawsuits arising from the normal conduct of its business. Due to the climate in insurance and business litigation, suits against the Company sometimes include substantial additional claims, consequential damages, punitive damages and other similar types of relief. While it is not possible to forecast the outcome of such litigation, it is the opinion of management that the disposition of such lawsuits will not have a material adverse effect on the Company's financial position or interfere with its operations. ________________________________________________________________________________ 102 Strategic Advantage Security Life of Denver Insurance Company and Subsidiaries Notes to Consolidated Financial Statements (continued) 15. FINANCING ARRANGEMENTS The Company has a $105,274,000 line of credit issued by the Company's parent to provide short-term liquidity. The Company has an additional non-affiliated line of credit of $100,000,000 also to provide short-term liquidity which expires June 30, 1997. The amount of funds available under this line is reduced by borrowings of certain affiliates also party to the agreement. There were no outstanding borrowings under either of these agreements at December 31, 1996 or 1995. The average balance of short-term debt was $23.4 million during 1996. The weighted average interest rate paid on this debt during 1996 was 5.46%. The Company is the beneficiary of letters of credit totaling $93,252,000 that were established in accordance with the terms of reinsurance agreements. The terms of the letters of credit provide for automatic renewal for the following year at December 31, unless otherwise cancelled or terminated by either party to the financing. The letters were unused during both 1996 and 1995. ________________________________________________________________________________ 103 Strategic Advantage Report of Independent Auditors Policyholders Security Life Separate Account L1 of Security Life of Denver Insurance Company We have audited the accompanying statement of net assets of Security Life Separate Account L1 (comprising, respectively, the Neuberger & Berman Advisers Management Trust (comprising the Limited Maturity Bond, Growth, Government Income and Partners Portfolios) ("N&B"), the Alger American Fund (comprising the American Small Capitalization, American MidCap Growth, American Growth and American Leveraged AllCap Portfolios) ("Alger"), the Fidelity Variable Insurance Products Fund and Variable Insurance Products Fund II (comprising the Asset Manager, Growth, Overseas, Money Market and Index 500 Portfolios) ("Fidelity"), the INVESCO Variable Investment Funds, Inc. (comprising the Total Return, Industrial Income, High Yield and Utilities Portfolios) ("INVESCO") and Van Eck Worldwide Trust (comprising the Worldwide Balanced and Gold and Natural Resources Portfolios) ("Van Eck") Divisions) as of December 31, 1996, and the related statements of operations for the year then ended and changes in net assets for each of the two years in the period then ended. These financial statements are the responsibility of the Separate Account's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned as of December 31, 1996, by correspondence with the transfer agent. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Security Life Separate Account L1 at December 31, 1996, and the results of its operations for the year then ended and changes in its net assets for each of the two years in the period then ended, in conformity with generally accepted accounting principles. ERNST & YOUNG LLP Denver, Colorado April 9, 1997 ________________________________________________________________________________ 104 Strategic Advantage Security Life Separate Account L1 Statement of Net Assets December 31, 1996
TOTAL ALL TOTAL TOTAL TOTAL TOTAL TOTAL DIVISIONS N&B ALGER FIDELITY INVESCO VAN ECK --------------------------------------------------------------------------------- ASSETS Investments in mutual funds at market value; combined cost $54,275,545 (See Note C) $57,137,579 $10,501,407 $11,470,216 $30,788,682 $3,783,021 $594,253 --------------------------------------------------------------------------------- Total assets 57,137,579 10,501,407 11,470,216 30,788,682 3,783,021 594,253 --------------------------------------------------------------------------------- LIABILITIES Due to (from) Security Life of Denver (1,613,713) (35,546) (35,976) (1,508,299) 35,750 1,858 Due to (from) other divisions 894,465 (2,393) 150,103 897,366 148,975 (1,636) --------------------------------------------------------------------------------- Total liabilities (719,248) (37,939) 114,127 610,933 184,725 222 --------------------------------------------------------------------------------- Net assets $57,856,827 $10,539,346 $11,356,089 $31,399,615 $3,967,746 $594,031 ================================================================================= CONTRACT OWNER RESERVES Reserves for redeemable annuity contracts (See Note B) $57,856,827 $10,539,346 $11,356,089 $31,399,615 $3,967,746 $594,031 --------------------------------------------------------------------------------- TOTAL CONTRACT OWNER RESERVES $57,856,827 $10,539,346 $11,356,089 $31,399,615 $3,967,746 $594,031 ================================================================================= See accompanying notes.
________________________________________________________________________________ 105 Strategic Advantage Security Life Separate Account L1 Statement of Net Assets (continued) December 31, 1996
N & B ----------------------------------------------------------------------- TOTAL LIMITED GOVERNMENT N&B MATURITY BOND GROWTH INCOME PARTNERS ----------------------------------------------------------------------- ASSETS Investments in mutual funds at market value $10,501,407 $ 2,493,707 $ 1,797,629 $ 1,549,039 $ 4,661,032 ----------------------------------------------------------------------- Total assets 10,501,407 2,493,707 1,797,629 1,549,039 4,661,032 ----------------------------------------------------------------------- LIABILITIES Due to (from) Security Life of Denver (35,546) 1,631 (36,173) 1,096 (2,100) Due to (from) other divisions (2,393) - (1,912) (371) (110) ----------------------------------------------------------------------- Total liabilities (37,939) 1,631 (38,085) 725 (2,210) ----------------------------------------------------------------------- Net assets $10,539,346 $ 2,492,076 $ 1,835,714 $ 1,548,314 $ 4,663,242 ======================================================================= CONTRACT OWNER RESERVES Reserves for redeemable annuity contracts (See Note B) $10,539,346 $ 2,492,076 $ 1,835,714 $ 1,548,314 $ 4,663,242 ----------------------------------------------------------------------- TOTAL CONTRACT OWNER RESERVES $10,539,346 $ 2,492,076 $ 1,835,714 $ 1,548,314 $ 4,663,242 ======================================================================= Number of division units outstanding (See Note G) 218,725.891 133,567.983 142,773.403 275,892.457 ============================================================ Value per divisional unit $ 11.39 $ 13.74 $ 10.84 $ 16.90 ============================================================ See accompanying notes.
________________________________________________________________________________ 106 Strategic Advantage Security Life Separate Account L1 Statement of Net Assets (continued) December 31, 1996
ALGER ------------------------------------------------------------------------ AMERICAN AMERICAN AMERICAN TOTAL SMALL MIDCAP AMERICAN LEVERAGED ALGER CAPITALIZATION GROWTH GROWTH ALLCAP ------------------------------------------------------------------------ ASSETS Investments in mutual funds at market value $11,470,216 $ 4,480,399 $ 2,308,724 $ 3,808,543 $ 872,550 ------------------------------------------------------------------------ Total assets 11,470,216 4,480,399 2,308,724 3,808,543 872,550 ------------------------------------------------------------------------ LIABILITIES Due to (from) Security Life of Denver (35,976) (4,356) (25,479) (4,982) (1,159) Due to (from) other divisions 150,103 152,647 (852) (653) (1,039) ------------------------------------------------------------------------ Total liabilities 114,127 148,291 (26,331) (5,635) (2,198) ------------------------------------------------------------------------ Net assets $11,356,089 $ 4,332,108 $ 2,335,055 $ 3,814,178 $ 874,748 ======================================================================== CONTRACT OWNER RESERVES Reserves for redeemable annuity contracts (See Note B) $11,356,089 $ 4,332,108 $ 2,335,055 $ 3,814,178 $ 874,748 ------------------------------------------------------------------------ TOTAL CONTRACT OWNER RESERVES $11,356,089 $ 4,332,108 $ 2,335,055 $ 3,814,178 $ 874,748 ======================================================================== Number of division units outstanding (See Note G) 297,073.322 150,480.473 282,175.287 53,044.470 ============================================================= Value per divisional unit $ 14.58 $ 15.52 $ 13.52 $ 16.49 ============================================================= See accompanying notes.
________________________________________________________________________________ 107 Strategic Advantage Security Life Separate Account L1 Statement of Net Assets (continued) December 31, 1996
FIDELITY ---------------------------------------------------------------------------------------- TOTAL ASSET MONEY FIDELITY MANAGER GROWTH OVERSEAS MARKET INDEX 500 ---------------------------------------------------------------------------------------- ASSETS Investments in mutual funds at market value $30,788,682 $ 1,513,317 $ 6,998,086 $ 4,266,432 $ 7,785,143 $ 10,225,704 ---------------------------------------------------------------------------------------- Total assets 30,788,682 1,513,317 6,998,086 4,266,432 7,785,143 10,225,704 ---------------------------------------------------------------------------------------- LIABILITIES Due to (from) Security Life of Denver (1,508,299) (32,020) (29,464) (7,782) (1,438,819) (214) Due to (from) other divisions 897,366 - (21,869) (915) 928,296 (8,146) ---------------------------------------------------------------------------------------- Total liabilities (610,933) (32,020) (51,333) (8,697) (510,523) (8,360) ---------------------------------------------------------------------------------------- Net assets $31,399,615 $ 1,545,337 $ 7,049,419 $ 4,275,129 $ 8,295,666 $ 10,234,064 ======================================================================================== CONTRACT OWNER RESERVES Reserves for redeemable annuity contracts (See Note B) $31,399,615 $ 1,545,337 $ 7,049,419 $ 4,275,129 $ 8,295,666 $ 10,234,064 ---------------------------------------------------------------------------------------- TOTAL CONTRACT OWNER RESERVES $31,399,615 $ 1,545,337 $ 7,049,419 $ 4,275,129 $ 8,295,666 $ 10,234,064 ======================================================================================== Number of division units outstanding (See Note G) 123,908.168 470,285.667 367,948.109 753,707.969 640,890.650 =========================================================================== Value per divisional unit $ 12.47 $ 14.99 $ 11.62 $ 11.01 $ 15.97 =========================================================================== See accompanying notes.
________________________________________________________________________________ 108 Strategic Advantage Security Life Separate Account L1 Statement of Net Assets (continued) December 31, 1996
INVESCO ------------------------------------------------------------------- TOTAL TOTAL INDUSTRIAL INVESCO RETURN INCOME HIGH YIELD UTILITIES ------------------------------------------------------------------- ASSETS Investments in mutual funds at market value $3,783,021 $ 841,651 $ 1,371,266 $ 1,351,726 $ 218,378 ------------------------------------------------------------------- Total assets 3,783,021 841,651 1,371,266 1,351,726 218,378 ------------------------------------------------------------------- LIABILITIES Due to (from) Security Life of Denver (35,750) (38,816) 2,037 879 150 Due to (from) other divisions (148,975) 6,000 (388) (154,554) (33) ------------------------------------------------------------------- Total liabilities (184,725) (32,816) 1,649 (153,675) 117 ------------------------------------------------------------------- Net assets $3,967,746 $ 874,467 $ 1,369,617 $ 1,505,401 $ 218,261 =================================================================== CONTRACT OWNER RESERVES Reserves for redeemable annuity contracts (See Note B) $3,967,746 $ 874,467 $ 1,369,617 $ 1,505,401 $ 218,261 =================================================================== TOTAL CONTRACT OWNER RESERVES $3,967,746 $ 874,467 $ 1,369,617 $ 1,505,401 $ 218,261 =================================================================== Number of division units outstanding (See Note G) 64,490.483 87,035.356 108,999.107 18,008.490 ========================================================= Value per divisional unit $ 13.56 $ 15.74 $ 13.81 $ 12.12 ========================================================= See accompanying notes.
________________________________________________________________________________ 109 Strategic Advantage Security Life Separate Account L1 Statement of Net Assets (continued) December 31, 1996
VAN ECK ------------------------------------ GOLD AND TOTAL WORLDWIDE NATURAL VAN ECK BALANCED RESOURCES ------------------------------------ ASSETS Investments in mutual funds at market value $594,253 $ 327,886 $ 266,367 ------------------------------------ Total assets 594,253 327,886 266,367 ------------------------------------ LIABILITIES Due to (from) Security Life of Denver 1,858 1,181 677 Due to (from) other divisions (1,636) (1,100) (536) ------------------------------------ Total liabilities 222 81 141 ------------------------------------ Net assets $594,031 $ 327,805 $ 266,226 ==================================== CONTRACT OWNER RESERVES Reserves for redeemable annuity contracts (See Note B) $594,031 $ 327,805 $ 266,226 ------------------------------------ TOTAL CONTRACT OWNER RESERVES $594,031 $ 327,805 $ 266,226 ==================================== Number of division units outstanding (See Note G) 29,808.787 21,966.093 ============================ Value per divisional unit $ 11.00 $ 12.12 ============================ See accompanying notes.
________________________________________________________________________________ 110 Strategic Advantage Security Life Separate Account L1 Statement of Operations Year Ended December 31, 1996
TOTAL ALL TOTAL TOTAL TOTAL TOTAL TOTAL DIVISIONS N&B ALGER FIDELITY INVESCO VAN ECK INVESTMENT INCOME Dividends from mutual funds $1,183,779 $292,143 $ 56,842 $593,973 $238,653 $ 2,168 Less: Valuation period deductions (See Note B) 241,127 50,116 44,898 128,637 14,752 2,724 Net investment income (loss) 942,652 242,027 11,944 465,336 223,901 (556) REALIZED AND UNREALIZED GAINS (LOSSES) ON INVESTMENTS Net realized gains (losses) on investments 401,852 86,478 62,058 97,833 143,358 12,125 Net unrealized gains (losses) on investments 2,675,307 557,274 396,915 1,736,167 (43,084) 28,035 Net realized and unrealized gains (losses) on investments 3,077,159 643,752 458,973 1,834,000 100,274 40,160 NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $4,019,811 $885,779 $470,917 $2,299,336 $324,175 $39,604 ======================================================================== See accompanying notes.
________________________________________________________________________________ 111 Strategic Advantage Security Life Separate Account L1 Statement of Operations (continued) Year Ended December 31, 1996
N & B TOTAL LIMITED GOVERNMENT N&B MATURITY BOND GROWTH INCOME PARTNERS INVESTMENT INCOME Dividends from mutual funds $292,143 $127,305 $ 76,287 $35,420 $ 53,131 Less: Valuation period deductions (See Note B) 50,116 13,218 9,400 8,882 18,616 Net investment income (loss) 242,027 114,087 66,887 26,538 34,515 REALIZED AND UNREALIZED GAINS (LOSSES) ON INVESTMENTS Net realized gains (losses) on investments 86,478 (16,561) (22,601) 3,867 121,773 Net unrealized gains (losses) on investments 557,274 (29,330) 65,061 443 521,100 Net realized and unrealized gains (losses) on investments 643,752 (45,891) 42,460 4,310 642,873 NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $885,779 $ 68,196 $109,347 $30,848 $677,388 =========================================================== See accompanying notes.
________________________________________________________________________________ 112 Strategic Advantage Security Life Separate Account L1 Statement of Operations (continued) Year Ended December 31, 1996
ALGER AMERICAN AMERICAN AMERICAN TOTAL SMALL MIDCAP AMERICAN LEVERAGED ALGER CAPITALIZATION GROWTH GROWTH ALLCAP INVESTMENT INCOME Dividends from mutual funds $ 56,842 $ 7,668 $ 10,435 $ 37,109 $ 1,630 Less: Valuation period deductions (See Note B) 44,898 18,457 7,398 16,087 2,956 Net investment income (loss) 11,944 (10,789) 3,037 21,022 (1,326) REALIZED AND UNREALIZED GAINS (LOSSES) ON INVESTMENTS Net realized gains (losses) on investments 62,058 8,187 9,936 22,907 21,028 Net unrealized gains (losses) on investments 396,915 58,340 89,398 227,107 22,070 Net realized and unrealized gains (losses) on investments 458,973 66,527 99,334 250,014 43,098 NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $470,917 $ 55,738 $102,371 $271,036 $41,772 ========================================================== See accompanying notes.
________________________________________________________________________________ 113 Strategic Advantage Security Life Separate Account L1 Statement of Operations (continued) Year Ended December 31, 1996
FIDELITY --------------------------------------------------------------- TOTAL ASSET MONEY FIDELITY MANAGER GROWTH OVERSEAS MARKET INDEX 500 INVESTMENT INCOME Dividends from mutual funds $ 593,973 $ 9,800 $109,786 $ 27,966 $246,349 $ 200,072 Less: Valuation period deductions (See Note B) 128,637 3,818 25,455 16,972 35,006 47,386 Net investment income (loss) 465,336 5,982 84,331 10,994 211,343 152,686 REALIZED AND UNREALIZED GAINS (LOSSES) ON INVESTMENTS Net realized gains (losses) on investments 97,833 7,905 9,661 34,235 - 46,032 Net unrealized gains (losses) on investments 1,736,167 63,068 273,435 238,529 - 1,161,135 Net realized and unrealized gains (losses) on investments 1,834,000 70,973 283,096 272,764 - 1,207,167 NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $2,299,336 $76,955 $367,427 $283,758 $211,343 $1,359,853 =============================================================== See accompanying notes.
________________________________________________________________________________ 114 Strategic Advantage Security Life Separate Account L1 Statement of Operations (continued) Year Ended December 31, 1996
INVESCO TOTAL TOTAL INDUSTRIAL INVESCO RETURN INCOME HIGH YIELD UTILITIES INVESTMENT INCOME Dividends from mutual funds $238,653 $25,285 $ 93,816 $114,676 $ 4,876 Less: Valuation period deductions (See Note B) 14,752 3,402 4,272 6,357 721 Net investment income (loss) 223,901 21,883 89,544 108,319 4,155 REALIZED AND UNREALIZED GAINS (LOSSES) ON INVESTMENTS Net realized gains (losses) on investments 143,358 28,264 30,929 82,830 1,335 Net unrealized gains (losses) on investments (43,084) 10,956 (7,082) (53,402) 6,444 Net realized and unrealized gains (losses) on investments 100,274 39,220 23,847 29,428 7,779 NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $324,175 $61,103 $113,391 $137,747 $11,934 ========================================================= See accompanying notes.
________________________________________________________________________________ 115 Strategic Advantage Security Life Separate Account L1 Statement of Operations (continued) Year Ended December 31, 1996
VAN ECK GOLD AND TOTAL WORLDWIDE NATURAL VAN ECK BALANCED RESOURCES INVESTMENT INCOME Dividends from mutual funds $ 2,168 $ 169 $ 1,999 Less: Valuation period deductions (See Note B) 2,724 1,304 1,420 Net investment income (loss) (556) (1,135) 579 REALIZED AND UNREALIZED GAINS (LOSSES) ON INVESTMENTS Net realized gains (losses) on investments 12,125 2,984 9,141 Net unrealized gains (losses) on investments 28,035 19,343 8,692 Net realized and unrealized gains (losses) on investments 40,160 22,327 17,833 NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $39,604 $21,192 $18,412 ================================= See accompanying notes.
________________________________________________________________________________ 116 Strategic Advantage Security Life Separate Account L1 Statement of Changes in Net Assets Year Ended December 31, 1996
TOTAL ALL TOTAL TOTAL TOTAL TOTAL TOTAL DIVISIONS N&B ALGER FIDELITY INVESCO VAN ECK INCREASE IN NET ASSETS OPERATIONS Net investment income (loss) $ 942,652 $ 242,027 $ 11,944 $ 465,336 $ 222,901 $ (556) Net realized gains (losses) on investments 401,852 86,478 62,058 97,833 143,358 12,125 Net unrealized gains (losses) on investments 2,675,307 557,274 396,915 1,736,167 (43,084) 28,035 Increase in net assets from operations 4,019,811 885,779 470,917 2,229,336 324,175 39,604 CHANGES FROM PRINCIPAL TRANSACTIONS Net premiums 44,534,972 2,246,849 2,646,310 38,833,137 609,861 198,815 Cost of insurance and administrative expenses (2,843,666) (378,501) (531,589) (1,733,703) (158,637) (41,236) Benefit payments (9,641) - (9,457) (184) - - Surrenders (139,851) (10,863) (32,300) (89,374) (5,730) (1,584) Net transfers among divisions (including the guaranteed interest division in the general account) (905,917) 3,446,134 6,535,350 (13,409,127) 2,217,943 303,783 Other (25,415) 4,193 (1,186) (29,113) 1,108 (417) Increase from principal transactions 40,610,482 5,307,812 8,607,128 23,571,636 2,664,545 459,361 Total increase in net assets 44,630,293 6,193,591 9,078,045 25,870,972 2,988,720 498,965 Net assets at beginning of year 13,226,534 4,345,755 2,278,044 5,528,643 979,026 95,066 Net assets at end of year $57,856,827 $10,539,346 $11,356,089 $31,399,615 $3,967,746 $594,031 ================================================================================= See accompanying notes.
________________________________________________________________________________ 117 Strategic Advantage Security Life Separate Account L1 Statement of Changes in Net Assets (continued) Year Ended December 31, 1996
N & B TOTAL LIMITED GOVERNMENT N&B MATURITY BOND GROWTH INCOME PARTNERS INCREASE IN NET ASSETS OPERATIONS Net investment income (loss) $ 242,027 $ 114,087 $ 66,887 $ 26,538 $ 34,515 Net realized gains (losses) on investments 86,478 (16,561) (22,601) 3,867 121,773 Net unrealized gains (losses) on investments 557,274 (29,330) 65,061 443 521,100 Increase in net assets from operations 885,779 68,196 109,347 30,848 677,388 CHANGES FROM PRINCIPAL TRANSACTIONS Net premiums 2,246,849 317,539 634,087 372,680 922,543 Cost of insurance and administrative expenses (378,501) (74,422) (101,596) (56,065) (146,418) Benefit payments - - - - - Surrenders (10,863) (1,157) (2,385) (48) (7,273) Net transfers among divisions (including the guaranteed interest division in the general account) 3,446,134 398,684 433,683 368,389 2,245,378 Other 4,193 (272) (579) 41 5,003 Increase from principal transactions 5,307,812 640,372 963,210 684,997 3,019,233 Total increase in net assets 6,193,591 708,568 1,072,557 715,845 3,696,621 Net assets at beginning of year 4,345,755 1,783,508 763,157 832,469 966,621 Net assets at end of year $10,539,346 $2,492,076 $1,835,714 $1,548,314 $4,663,242 ==================================================================== See accompanying notes.
________________________________________________________________________________ 118 Strategic Advantage Security Life Separate Account L1 Statement of Changes in Net Assets (continued) Year Ended December 31, 1996
ALGER AMERICAN AMERICAN AMERICAN TOTAL SMALL MIDCAP AMERICAN LEVERAGED ALGER CAPITALIZATION GROWTH GROWTH ALLCAP INCREASE IN NET ASSETS OPERATIONS Net investment income (loss) $ 11,944 $ (10,789) $ 3,037 $ 21,022 $ (1,326) Net realized gains (losses) on investments 62,058 8,187 9,936 22,907 21,028 Net unrealized gains (losses) on investments 396,915 58,340 89,398 227,107 22,070 Increase in net assets from operations 470,917 55,738 102,371 271,036 41,772 CHANGES FROM PRINCIPAL TRANSACTIONS Net premiums 2,646,310 792,375 410,528 1,189,559 253,848 Cost of insurance and administrative expenses (531,589) (209,010) (92,306) (193,812) (36,461) Benefit payments (9,457) (4,658) - - (4,799) Surrenders (32,300) (7,839) (10,926) (9,795) (3,740) Net transfers among divisions (including the guaranteed interest division in the general account) 6,535,350 2,581,122 1,649,714 1,717,965 586,549 Other (1,186) (3,605) 587 1,213 619 Increase from principal transactions 8,607,128 3,148,385 1,957,597 2,705,130 796,016 Total increase in net assets 9,078,045 3,204,123 2,059,968 2,976,166 837,788 Net assets at beginning of year 2,278,044 1,127,985 275,087 838,012 36,960 Net assets at end of year $11,356,089 $4,332,108 $2,335,055 $3,814,178 $874,748 ==================================================================== See accompanying notes.
________________________________________________________________________________ 119 Strategic Advantage Security Life Separate Account L1 Statement of Changes in Net Assets (continued) Year Ended December 31, 1996
FIDELITY ---------------------------------------------------------------------------------- TOTAL ASSET MONEY FIDELITY MANAGER GROWTH OVERSEAS MARKET INDEX 500 INCREASE IN NET ASSETS OPERATIONS Net investment income (loss) $ 465,336 $ 5,982 $ 84,331 $ 10,994 $ 211,343 $ 152,686 Net realized gains (losses) on investments 97,833 7,905 9,661 34,235 - 46,032 Net unrealized gains (losses) on investments 1,736,167 63,068 273,435 238,529 - 1,161,135 Increase in net assets from operations 2,299,336 76,955 367,427 283,758 211,343 1,359,853 CHANGES FROM PRINCIPAL TRANSACTIONS Net premiums 38,833,137 202,285 1,158,382 537,007 36,012,540 922,923 Cost of insurance and administrative expenses (1,733,703) (59,703) (298,466) (145,781) (938,219) (291,534) Benefit payments (184) - - - - (184) Surrenders (89,374) (973) (9,215) (8,511) (56,983) (13,692) Net transfers among divisions (including the guaranteed interest division in the general account) (13,409,127) 1,199,005 4,485,230 2,637,971 (28,785,556) 7,054,223 Other (29,113) 277 (47) (13) (27,783) (1,547) Increase from principal transactions 23,571,636 1,340,891 5,335,884 3,020,673 6,203,999 7,670,189 Total increase in net assets 25,870,972 1,417,846 5,703,311 3,304,431 6,415,342 9,030,042 Net assets at beginning of year 5,528,643 127,491 1,346,108 970,698 1,880,324 1,204,022 Net assets at end of year $ 31,399,615 $1,545,337 $7,049,419 $4,275,129 $ 8,295,666 $10,234,064 ================================================================================== See accompanying notes.
________________________________________________________________________________ 120 Strategic Advantage Security Life Separate Account L1 Statement of Changes in Net Assets (continued) Year Ended December 31, 1996
INVESCO ---------------------------------------------------------------- TOTAL TOTAL INDUSTRIAL INVESCO RETURN INCOME HIGH YIELD UTILITIES ---------------------------------------------------------------- INCREASE IN NET ASSETS OPERATIONS Net investment income (loss) $ 223,901 $ 21,883 $ 89,544 $ 108,319 $ 4,155 Net realized gains (losses) on investments 143,358 28,264 30,929 82,830 1,335 Net unrealized gains (losses) on investments (43,084) 10,956 (7,082) (53,402) 6,444 Increase in net assets from ---------------------------------------------------------------- operations 324,175 61,103 113,391 137,747 11,934 ---------------------------------------------------------------- CHANGES FROM PRINCIPAL TRANSACTIONS Net premiums 609,861 199,674 243,848 121,818 44,521 Cost of insurance and administrative expenses (158,637) (45,283) (55,233) (48,934) (9,187) Benefit payments - - - - - Surrenders (5,730) (2,038) (2,171) (1,386) (135) Net transfers among divisions (including the guaranteed interest division in the general account) 2,217,943 506,505 810,269 750,404 150,765 Other 1,108 943 (126) 277 14 ---------------------------------------------------------------- Increase from principal transactions 2,664,545 659,801 996,587 822,179 185,978 ---------------------------------------------------------------- Total increase in net assets 2,988,720 720,904 1,109,978 959,926 197,912 Net assets at beginning of year 979,026 153,563 259,639 545,475 20,349 ---------------------------------------------------------------- Net assets at end of year $3,967,746 $874,467 $1,369,617 $1,505,401 $218,261 ================================================================
See accompanying notes. ________________________________________________________________________________ 121 Strategic Advantage Security Life Separate Account L1 Statement of Changes in Net Assets (continued) Year Ended December 31, 1996
VAN ECK ------------------------------------ GOLD AND TOTAL WORLDWIDE NATURAL VAN ECK BALANCED RESOURCES ------------------------------------ INCREASE IN NET ASSETS OPERATIONS Net investment income (loss) $ (556) $ (1,135) $ 579 Net realized gains (losses) on investments 12,125 2,984 9,141 Net unrealized gains (losses) on investments 28,035 19,343 8,692 ------------------------------------ Increase in net assets from operations 39,604 21,192 18,412 ------------------------------------ CHANGES FROM PRINCIPAL TRANSACTIONS Net premiums 198,815 135,181 63,634 Cost of insurance and administrative expenses (41,236) (29,480) (11,756) Benefit payments - - - Surrenders (1,584) (1,584) - Net transfers among divisions (including the guaranteed interest division in the general account) 303,783 126,152 177,631 Other (417) (468) 51 ------------------------------------ Increase from principal transactions 459,361 229,801 229,560 ------------------------------------ Total increase in net assets 498,965 250,993 247,972 Net assets at beginning of year 95,066 76,812 18,254 ------------------------------------ Net assets at end of year $594,031 $327,805 $266,226 ====================================
See accompanying notes. ________________________________________________________________________________ 122 Strategic Advantage Security Life Separate Account L1 Statement of Changes in Net Assets Year Ended December 31, 1995
TOTAL ALL TOTAL TOTAL TOTAL TOTAL TOTAL DIVISIONS N&B ALGER FIDELITY INVESCO VAN ECK ---------------------------------------------------------------------- INCREASE IN NET ASSETS - ---------------------- OPERATIONS Net investment income (loss) $ 97,403 $ (11,173) (5,428) $ 60,063 $ 53,712 $ 229 Net realized gains (losses) on investments 76,547 25,418 17,143 28,840 4,788 358 Net unrealized gains (losses) on investments 186,727 144,429 (54,571) 102,924 (6,574) 519 ---------------------------------------------------------------------- Increase (decrease) in net assets from operations 360,677 158,674 (42,856) 191,827 51,926 1,106 ---------------------------------------------------------------------- CHANGES FROM PRINCIPAL TRANSACTIONS Net premiums 13,329,581 39,552 255,704 12,996,026 28,034 10,265 Cost of insurance and administrative expenses (515,616) (94,109) (72,491) (327,795) (17,857) (3,364) Net transfers among divisions (including the guaranteed interest division in the general account) - 4,235,249 2,130,456 (7,368,518) 915,744 87,069 Other 19,851 6,389 7,231 5,062 1,179 (10) ---------------------------------------------------------------------- Increase from principal transactions 12,833,816 4,187,081 2,320,900 5,304,775 927,100 93,960 ---------------------------------------------------------------------- Total increase in net assets 13,194,493 4,345,755 2,278,044 5,496,602 979,026 95,066 Net assets at beginning of year 32,041 - - 32,041 - - ---------------------------------------------------------------------- Net assets at end of year $13,226,534 $4,345,755 2,278,044 $5,528,643 $979,026 $95,066 ======================================================================
See accompanying notes. ________________________________________________________________________________ 123 Strategic Advantage Security Life Separate Account L1 Statement of Changes in Net Assets (continued) Year Ended December 31, 1995
N & B --------------------------------------------------------------------- TOTAL LIMITED GOVERNMENT N&B MATURITY BOND GROWTH INCOME PARTNERS --------------------------------------------------------------------- INCREASE IN NET ASSETS OPERATIONS Net investment income (loss) $ (11,173) $ (4,559) $ (1,683) $ (2,366) $ (2,565) Net realized gains (losses) on investments 25,418 8,399 4,077 2,729 10,213 Net unrealized gains (losses) on investments 144,429 54,564 (1,928) 33,629 58,164 --------------------------------------------------------------------- Increase (decrease) in net assets from from operations 158,674 58,404 466 33,992 65,812 --------------------------------------------------------------------- CHANGES FROM PRINCIPAL TRANSACTIONS Net premiums 39,552 4,133 13,771 12,086 9,562 Cost of insurance and administrative expenses (94,109) (25,947) (23,846) (15,635) (28,681) Net transfers among divisions (including the guaranteed interest division in the general account) 4,235,249 1,745,908 770,482 801,675 917,184 Other 6,389 1,010 2,284 351 2,744 --------------------------------------------------------------------- Increase from principal transactions 4,187,081 1,725,104 762,691 798,477 900,809 --------------------------------------------------------------------- Total increase in net assets 4,345,755 1,783,508 763,157 832,469 966,621 Net assets at beginning of year - - - - - --------------------------------------------------------------------- Net assets at end of year $4,345,755 $1,783,508 $763,157 $832,469 $966,621 =====================================================================
See accompanying notes. ________________________________________________________________________________ 124 Strategic Advantages Security Life Separate Account L1 Statement of Changes in Net Assets (continued) Year Ended December 31, 1995
ALGER ------------------------------------------------------------------ AMERICAN AMERICAN AMERICAN TOTAL SMALL MIDCAP AMERICAN LEVERAGED ALGER CAPITALIZATION GROWTH GROWTH ALLCAP ------------------------------------------------------------------ INCREASE IN NET ASSETS OPERATIONS Net investment income (loss) $ (5,428) $ (2,496) $ (548) $ (2,242) $ (142) Net realized gains (losses) on investments 17,143 19,457 3,402 1,513 (7,229) Net unrealized gains (losses) on investments (54,571) (57,427) 3,400 (1,664) 1,120 ------------------------------------------------------------------ Increase (decrease) in net assets from operations (42,856) (40,466) 6,254 (2,393) (6,251) ------------------------------------------------------------------ CHANGES FROM PRINCIPAL TRANSACTIONS Net premiums 255,704 224,681 18,375 9,493 3,155 Cost of insurance and administrative expenses (72,491) (24,235) (8,062) (38,073) (2,121) Net transfers among divisions (including the guaranteed interest division in the general account) 2,130,456 963,613 257,593 866,852 42,398 Other 7,231 4,392 927 2,133 (221) ------------------------------------------------------------------ Increase from principal transactions 2,320,900 1,168,451 268,833 840,405 43,211 ------------------------------------------------------------------ Total increase in net assets 2,278,044 1,127,985 275,087 838,012 36,960 Net assets at beginning of year - - - - - ------------------------------------------------------------------ Net assets at end of year $2,278,044 $1,127,985 $275,087 $838,012 $36,960 ==================================================================
See accompanying notes. ________________________________________________________________________________ 125 Strategic Advantage Security Life Separate Account L1 Statement of Changes in Net Assets (continued) Year Ended December 31, 1995
FIDELITY ---------------------------------------------------------------------------- TOTAL ASSET MONEY FIDELITY MANAGER GROWTH OVERSEAS MARKET INDEX 500 ---------------------------------------------------------------------------- INCREASE IN NET ASSETS OPERATIONS Net investment income (loss) $ 60,063 $ (257) $ (3,373) $ (2,080) $ 68,179 $ (2,406) Net realized gains (losses) on investments 28,840 632 13,932 2,684 - 11,592 Net unrealized gains (losses) on investments 102,924 6,607 (11,822) 28,250 - 79,889 ---------------------------------------------------------------------------- Increase (decrease) in net assets from operations 191,827 6,982 (1,263) 28,854 68,179 89,075 ---------------------------------------------------------------------------- CHANGES FROM PRINCIPAL TRANSACTIONS Net premiums 12,996,026 18,939 37,113 24,037 12,848,110 67,827 Cost of insurance and administrative expenses (327,795) (5,716) (45,365) (17,969) (242,041) (16,704) Net transfers among divisions (including the guaranteed interest division in the general account) (7,368,518) 107,141 1,355,450 935,792 (10,830,183) 1,063,282 Other 5,062 145 173 (16) 4,218 542 ---------------------------------------------------------------------------- Increase from principal transactions 5,304,775 120,509 1,347,371 941,844 1,780,104 1,114,947 ---------------------------------------------------------------------------- Total increase in net assets 5,496,602 127,491 1,346,108 970,698 1,848,283 1,204,022 Net assets at beginning of year 32,041 - - - 32,041 - ---------------------------------------------------------------------------- Net assets at end of year $ 5,528,643 $127,491 $1,346,108 $970,698 $ 1,880,324 $1,204,022 ============================================================================
See accompanying notes. ________________________________________________________________________________ 126 Strategic Advantages Security Life Separate Account L1 Statement of Changes in Net Assets (continued) Year Ended December 31, 1995
INVESCO --------------------------------------------------------------- TOTAL TOTAL INDUSTRIAL INVESCO RETURN INCOME HIGH YIELD UTILITIES --------------------------------------------------------------- INCREASE IN NET ASSETS OPERATIONS Net investment income (loss) $ 53,712 $ 2,850 $ 8,653 $ 42,118 $ 91 Net realized gains (losses) on investments 4,788 2,380 1,156 1,237 15 Net unrealized gains (losses) on investments (6,574) 2,264 12,495 (22,224) 891 --------------------------------------------------------------- Increase (decrease) in net assets from operations 51,926 7,494 22,304 21,131 997 --------------------------------------------------------------- CHANGES FROM PRINCIPAL TRANSACTIONS Net premiums 28,034 3,844 12,548 8,941 2,701 Cost of insurance and administrative expenses (17,857) (4,401) (5,390) (6,776) (1,290) Net transfers among divisions (including the guaranteed interest division in the general account) 915,744 145,676 230,040 522,094 17,934 Other 1,179 950 137 85 7 --------------------------------------------------------------- Increase from principal transactions 927,100 146,069 237,335 524,344 19,352 --------------------------------------------------------------- Total increase in net assets 979,026 153,563 259,639 545,475 20,349 Net assets at beginning of year - - - - - --------------------------------------------------------------- Net assets at end of year $979,026 $153,563 $259,639 $545,475 $20,349 =============================================================== See accompanying notes.
________________________________________________________________________________ 127 Strategic Advantage Security Life Separate Account L1 Statement of Changes in Net Assets (continued) Year Ended December 31, 1995
VAN ECK -------------------------------------- GOLD AND TOTAL WORLDWIDE NATURAL VAN ECK BALANCED RESOURCES -------------------------------------- INCREASE IN NET ASSETS OPERATIONS Net investment income (loss) $ 229 $ 245 $ (16) Net realized gains (losses) on investments 358 (5) 363 Net unrealized gains (losses) on investments 519 (62) 581 -------------------------------------- Increase (decrease) in net assets from operations 1,106 178 928 -------------------------------------- CHANGES FROM PRINCIPAL TRANSACTIONS Net premiums 10,265 6,352 3,913 Cost of insurance and administrative expenses (3,364) (2,360) (1,004) Net transfers among divisions (including the guaranteed interest division in the general account) 87,069 72,661 14,408 Other (10) (19) 9 -------------------------------------- Increase from principal transactions 93,960 76,634 17,326 -------------------------------------- Total increase in net assets 95,066 76,812 18,254 Net assets at beginning of year - - - -------------------------------------- Net assets at end of year $95,066 $76,812 $18,254 ======================================
See accompanying notes. ________________________________________________________________________________ 128 strategic Advantage Security Life Separate Account L1 Notes to Financial Statements December 31, 1996 NOTE A. ORGANIZATION Security Life Separate Account L1 (the "Separate Account") was established by resolution of the Board of Directors of Security Life of Denver Insurance Company (the "Company") on November 3, 1993. The Separate Account is organized as a unit investment trust registered with the Securities and Exchange Commission under the Investment Company Act of 1940. The Separate Account supports the operations of the FirstLine and Strategic Advantage Variable Universal Life ("FirstLine and Strategic Advantage") policies offered by the Company. The Separate Account may be used to support other variable life policies as they are offered by the Company. The assets of the Separate Account are the property of the Company. However, the portion of the Separate Account's assets attributable to the policies will not be chargeable with liabilities arising out of any other operations of the Company. The Separate Account currently consists of nineteen investment divisions available to the policyholders, each of which invests in an independently managed mutual fund portfolio ("Fund"). The Funds are as follows: PORTFOLIO MANAGERS/PORTFOLIOS (FUNDS) Neuberger & Berman (N&B) Neuberger & Berman Limited Maturity Bond Portfolio Neuberger & Berman Growth Portfolio Neuberger & Berman Government Income Portfolio Neuberger & Berman Partners Portfolio ________________________________________________________________________________ 129 Strategic Advantage Security Life Separate Account L1 Notes to Financial Statements (continued) NOTE A. ORGANIZATION (CONTINUED) Fred Alger Management, Inc. (Alger) Alger American Small Capitalization Portfolio Alger American MidCap Growth Portfolio Alger American Growth Portfolio Alger American Leveraged AllCap Portfolio Fidelity Management & Research Company (Fidelity) Fidelity Investments VIP II Asset Manager Portfolio Fidelity Investments VIP Growth Portfolio Fidelity Investments VIP Overseas Portfolio Fidelity Investments VIP Money Market Portfolio Fidelity Investments VIP II Index 500 Portfolio INVESCO Funds Group, Inc. (INVESCO) INVESCO VIF Total Return Portfolio INVESCO VIF Industrial Income Portfolio INVESCO VIF High Yield Portfolio INVESCO VIF Utilities Portfolio Van Eck Investment Trust (Van Eck) Van Eck Worldwide Balanced Portfolio Van Eck Gold and Natural Resources Portfolio The FirstLine and Strategic Advantage policies allow the policyholders to specify the allocation of their net premium to the various Funds. They can also transfer their account values among the Funds. The FirstLine and Strategic Advantage products also provide the policyholders the option to allocate their net premiums, or to transfer their account values, to a Guaranteed Interest Division (GID) in the Company's general account. The GID guarantees a rate of interest to the policyholder, and it is not variable in nature. Therefore, it is not included in these Separate Account statements. Effective May 1, 1997, the Divisions of the Separate Account investing in the Neuberger & Berman Government Income Portfolio and the Van Eck Worldwide Balanced Fund will no longer be accepting new investments. ________________________________________________________________________________ 130 Strategic Advantage Security Life Separate Account L1 Notes to Financial Statements (continued) NOTE B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The accompanying financial statements of the Separate Account have been prepared on the basis of generally accepted accounting principles. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The accounting principles followed by the Separate Account and the methods of applying those principles are presented below or in the footnotes which follow: INVESTMENT VALUATION--The investments in shares of the Funds are valued at the closing net asset value (market value) per share as determined by the Funds on the day of measurement. INVESTMENT TRANSACTIONS AND RELATED INVESTMENT INCOME--The investments in shares of the Funds are accounted for on the date the order to buy or sell is confirmed. Dividend income and distributions of capital gains are recorded on the ex-dividend date. Realized gains and losses from security transactions are reported using the first-in-first-out (FIFO) method of accounting for cost. The difference between cost and current market value of investments owned on the day of measurement is recorded as unrealized gain or loss on investment. VALUATION PERIOD DEDUCTIONS--Charges are made directly against the assets of the Separate Account divisions and are reflected daily in the computation of the unit values of the divisions. For FirstLine and Strategic Advantage policies, a daily deduction, at an annual rate of .75% of the daily asset value of the Separate Account divisions is charged to the Separate Account for mortality and expense risks assumed by the Company. Total mortality and expense charges for the year ended December 31, 1996 were $241,127. ________________________________________________________________________________ 131 Strategic Advantage Security Life Separate Account L1 Notes to Financial Statements (continued) NOTE B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) POLICYHOLDER RESERVES--Policyholder reserves are recorded in the Separate Account at the aggregate account values of the policyholders invested in the Separate Account divisions. To the extent that benefits to be paid to the policyholders exceed their account values, the Company will contribute additional funds to the benefit proceeds. NOTE C. INVESTMENTS Fund shares are purchased at net asset value with net premiums (premium payments, less sales and tax loads charged by the Company) and divisional transfers from other divisions. Fund shares are redeemed for the payment of benefits, for surrenders, for transfers to other divisions, and for charges by the Company for certain cost of insurance and administrative charges. The cost of insurance and administrative charges were $2,843,666 for the year ended December 31, 1996. Distributions made by the Funds are reinvested in the Funds. ________________________________________________________________________________ 132 Strategic Advantage Security Life Separate Account L1 Notes to Financial Statements (continued) NOTE C. INVESTMENTS (CONTINUED) The following is a summary of fund shares owned as of December 31, 1996:
NUMBER NET VALUE OF ASSET OF SHARES COST OF FUND SHARES VALUE AT MARKET SHARES - --------------------------------------------------------------------------------------- Neuberger & Berman: Limited Maturity Bond 177,488.06 $14.05 $ 2,493,707 $ 2,468,473 Growth 69,729.59 25.78 1,797,629 1,734,496 Government Income 145,723.35 10.63 1,549,039 1,514,968 Partners 282,829.62 16.48 4,661,032 4,081,769 Fred Alger Management, Inc.: American Small Capitalization 109,518.40 40.91 4,480,399 4,479,487 American MidCap Growth 108,136.97 21.35 2,308,724 2,215,923 American Growth 110,939.21 34.33 3,808,543 3,583,100 American Leveraged AllCap 45,069.71 19.36 872,550 849,359 Fidelity Management & Research Co.: Asset Manager 89,386.84 16.93 1,513,317 1,443,642 Growth 224,729.85 31.14 6,998,086 6,736,473 Overseas 226,456.08 18.84 4,266,432 3,999,654 Money Market 7,785,142.70 1.00 7,785,143 7,785,143 Index 500 114,727.97 89.13 10,225,704 8,984,680 INVESCO Funds Group, Inc.: Total Return 63,713.18 13.21 841,651 828,431 Industrial Income 95,691.99 14.33 1,371,266 1,365,853 High Yield 114,747.49 11.78 1,351,726 1,427,352 Utilities 18,274.30 11.95 218,378 211,043 Van Eck Investment Trust: Worldwide Balanced 29,433.17 11.14 327,886 308,605 Gold and Natural Resources 15,931.07 16.72 266,367 257,094 Total $57,137,579 $54,275,545 ==========================
For the year ended December 31, 1996, the aggregate cost of purchases (plus reinvested dividends) and the proceeds from sales of investments were $71,906,031 and $31,000,056, respectively. ________________________________________________________________________________ 133 Strategic Advantage Security Life Separate Account L1 Notes to Financial Statements (continued) NOTE D. OTHER POLICY DEDUCTIONS The FirstLine and Strategic Advantage products provide for certain deductions for sales and tax loads from premium payments received from the policyholders and for surrender charges and taxes from amounts paid to policyholders. Such deductions are taken before the purchase of divisional units or after the redemption of divisional units of the Separate Account. Such deductions are not included in the Separate Account financial statements. NOTE E. POLICY LOANS The FirstLine and Strategic Advantage policies allow the policyholders to borrow against their policies by using them as collateral for a loan. At the time they borrow against their policies, an amount equal to the loan amount is transferred from the Separate Account divisions to a Loan Division to secure the loan. As payments are made on the policy loan, amounts are transferred back from the Loan Division to the Separate Account divisions. Interest is credited to the balance in the Loan Division at a fixed rate. The Loan Division is not variable in nature and is not included in these Separate Account statements. NOTE F. FEDERAL INCOME TAXES The Separate Account is not taxed separately because the operations of the Separate Account are part of the total operations of the Company. The Company is taxed as a life insurance company under the Internal Revenue Code. The Separate Account is not taxed as a "Regulated Investment Company" under subchapter "M" of the Internal Revenue Code. ________________________________________________________________________________ 134 Strategic Advantage Security Life Separate Account L1 Notes to Financial Statements (continued) NOTE G. SUMMARY OF CHANGES IN UNITS The following schedule summarizes the changes in divisional units for the year ended December 31, 1996;
(DECREASE) FOR COI INCREASE AND OUTSTANDING INCREASE (DECREASE) ADMINISTRATIVE OUTSTANDING AT BEGINNING FOR PAYMENTS FOR DIVISIONAL CHARGES AND AT END DIVISION OF YEAR RECEIVED TRANSFERS SURRENDERS OF YEAR - ----------------------------------------------------------------------------------------------------------------------- Neuberger & Berman: Limited Maturity Bond 162,009.578 22,341.563 34,959.370 (584.620) 218.725.891 Growth 60,162.107 40,992.586 33,140.220 (726.930) 133,567.893 Government Income 77,187.706 30,340.987 35,590.000 (345.290) 142,773.403 Partners 73,535.288 52,840.719 150,615.480 (1,099.030) 275,892.457 Fred Alger Management, Inc.: American Small Capitalization 80,027.266 41.830.466 176,940.020 (1,724.430) 297,073.322 American MidCap Growth 19,692.860 21,703.253 110,111,630 (1,027.270) 150,480.473 American Growth 69,805.233 79,036.444 135,021.170 (1,687.560) 282,175.287 American Leveraged AllCap 2,494.731 14,117,529 37,093.470 (661.260) 53,044.470 Fidelity Management & Research Co: Asset Manager 11,627.088 11,928.100 100,648.740 (295.760) 123,908.168 Growth 102,248.988 60,000.429 309,854.870 (1,818.620) 470,285.667 Overseas 93,906.733 36,170.266 239,414.430 (1,543.320) 367,948.109 Money Market 178,653.159 3,714,656.740 (2,593,671.600) (5,930.330) 753,707.969 Index 500 91,903.027 43,453,963 507,578.000 (2,044.340) 640,890.650 INVESCO Funds Group, Inc.: Total Return 12,602.644 11,847.269 40,812.090 (771.540) 64,490.483 Industrial Income 20,026.102 12,961.494 54,377.610 (329.850) 87,035.356 High Yield 45,708.358 5,929.679 57,717.210 (356.140) 108,999.107 Utilities 1,879.859 3,104.181 13,093.330 (68.880) 18,008.490 Van Eck Investment Trust: Worldwide Balanced 7,739.274 10,375.993 12,036.370 (342.850) 29,808.787 Gold and Natural Resources 1,765.913 4,573.270 15,683.750 (56.840) 21,966.093
________________________________________________________________________________ 135 Strategic Advantage Security Life Separate Account L1 Notes to Financial Statements (continued) NOTE G. SUMMARY OF CHANGES IN UNITS (CONTINUED) The following schedule summarizes the changes in divisional units for the year ended December 31, 1995:
(DECREASE) INCREASE FOR COI OUTSTANDING INCREASE (DECREASE) AND OUTSTANDING AT BEGINNING FOR PAYMENTS FOR DIVISIONAL ADMINISTRATIVE AT END DIVISION OF YEAR RECEIVED TRANSFERS CHARGES OF YEAR - ------------------------------------------------------------------------------------------------------------------- Neuberger & Berman: Limited Maturity Bond 0,000 382,961 164,031,781 (2,405,164) 162,009,578 Growth 0,000 1,107,568 60,922,448 (1,867,909) 60,162,107 Government Income 0,000 1,154,992 77,524,888 (1,492,174) 77,187,706 Partners 0,000 777,847 75,027,133 (2,269,692) 73,535,288 Fred Alger Management, Inc.: American Small Capitalization 0,000 15,032,912 66,694,332 (1,699,978) 80,027,266 American MidCap Growth 0,000 1,336,898 18,942,171 (586,209) 19,692,860 American Growth 0,000 795,728 72,142,081 (3,132,576) 69,805,233 American Leveraged AllCap 0,000 217,078 2,424,066 (146,413) 2,494,731 Fidelity Management & Research Co: Asset Manager 0,000 1,811,445 10,363,454 (547,811) 11,627,088 Growth 0,000 2,796,390 102,856,769 (3,404,171) 102,248,988 Overseas 0,000 2,389,778 93,305,776 (1,788,821) 93,906,733 Money Market 3,200,637 1,244,243,280 (1,045,323,517) (23,467,241) 178,653,159 Index 500 0,000 5,636,625 87,615,828 (1,349,426) 91,903,027 INVESCO Funds Group, Inc.: Total Return 0,000 329,342 12,652,423 (379,101) 12,602,664 Industrial Income 0,000 1,040,189 19,427,874 (441,961) 20,026,102 High Yield 0,000 766,963 45,527,967 (586,572) 45,708,358 Utilities 0,000 261,166 1,744,166 (125,473) 1,879,859 Van Eck Investment Trust: Worldwide Balanced 0,000 639,571 7,336,953 (237,250) 7,739,274 Gold and Natural Resources 0,000 384,059 1,482,141 (100,287) 1,765,913
________________________________________________________________________________ 136 Strategic Advantage Security Life Separate Account L1 Notes to Financial Statements (continued) NOTE H. NET ASSETS Net assets at December 31, 1996 consisted of the following:
ACCUMULATED NET ACCUMULATED NET REALIZED UNREALIZED INVESTMENT GAINS GAINS PRINCIPAL INCOME (LOSSES) ON (LOSSES) ON DIVISION TRANSACTIONS (LOSS) INVESTMENTS INVESTMENTS NET ASSETS - -------------------------------------------------------------------------------------------------------------- Neuberger & Berman: Limited Maturity Bond $ 2,365,476 $ 109,528 $ (8,162) $ 25,234 $ 2,492,076 Growth 1,725,901 65,204 (18,524) 63,133 1,835,714 Government Income 1,483,474 24,172 6,596 34,072 1,548,314 Partners 3,920,042 31,950 131,986 579,264 4,663,242 Fred Alger Management, Inc.: American Small Capitalization 4,316,836 (13,285) 27,644 913 4,332,108 American MidCap Growth 2,226,430 2,489 13,338 92,798 2,335,055 American Growth 3,545,535 18,780 24,420 225,443 3,814,178 American Leveraged AllCap 839,227 (1,468) 13,799 23,190 874,748 Fidelity Management & Research Co: Asset Manager 1,461,400 5,725 8,537 69,675 1,545,337 Growth 6,683,255 80,958 23,593 261,613 7,049,419 Overseas 3,962,517 8,914 36,919 266,779 4,275,129 Money Market 8,016,110 279,556 - - 8,295,666 Index 500 8,785,136 150,280 57,624 1,241,024 10,234,064 INVESCO Funds Group, Inc.: Total Return 805,870 24,733 30,644 13,220 874,467 Industrial Income 1,233,922 98,197 32,085 5,413 1,369,617 High Yield 1,346,523 150,437 84,067 (75,626) 1,505,401 Utilities 205,330 4,246 1,350 7,335 218,261 Van Eck Investment Trust: Worldwide Balanced 306,435 (890) 2,979 19,281 327,805 Gold and Natural Resources 246,886 563 9,504 9,273 266,226 ---------------------------------------------------------------------- Total $53,476,305 $1,040,089 $478,399 $2,862,034 $57,856,827 ======================================================================
________________________________________________________________________________ 137 Strategic Advantage APPENDIX A Factors for the Cash Value Accumulation Test For a Life Insurance Policy MALE NONSMOKER
Attained Attained Attained Attained Age Factor Age Factor Age Factor Age Factor 0 12.574 25 6.095 50 2.671 75 1.396 1 12.681 26 5.904 51 2.589 76 1.372 2 12.341 27 5.717 52 2.509 77 1.349 3 11.996 28 5.533 53 2.433 78 1.328 4 11.655 29 5.354 54 2.360 79 1.307 5 11.316 30 5.179 55 2.290 80 1.288 6 10.979 31 5.008 56 2.223 81 1.270 7 10.644 32 4.843 57 2.159 82 1.253 8 10.311 33 4.682 58 2.097 83 1.236 9 9.982 34 4.527 59 2.038 84 1.221 10 9.660 35 4.376 60 1.982 85 1.207 11 9.345 36 4.231 61 1.928 86 1.195 12 9.041 37 4.091 62 1.877 87 1.183 13 8.750 38 3.955 63 1.828 88 1.172 14 8.476 39 3.825 64 1.781 89 1.161 15 8.218 40 3.699 65 1.736 90 1.151 16 7.973 41 3.577 66 1.694 91 1.141 17 7.740 42 3.461 67 1.654 92 1.131 18 7.517 43 3.348 68 1.615 93 1.120 19 7.301 44 3.240 69 1.579 94 1.109 20 7.091 45 3.136 70 1.544 95 1.097 21 6.886 46 3.036 71 1.511 96 1.083 22 6.684 47 2.939 72 1.480 97 1.069 23 6.484 48 2.847 73 1.450 98 1.054 24 6.288 49 2.757 74 1.422 99 1.040 100 1.000
THE POLICY'S BASE DEATH BENEFIT AT ANY TIME WILL BE AT LEAST EQUAL TO THE ACCOUNT VALUE TIMES THE APPROPRIATE FACTOR FROM THIS TABLE. ________________________________________________________________________________ 138 Strategic Advantage APPENDIX A (CONT.) Factors for the Cash Value Accumulation Test For a Life Insurance Policy MALE SMOKER
Attained Attained Attained Attained Age Factor Age Factor Age Factor Age Factor 0 10.511 25 4.963 50 2.267 75 1.330 1 10.508 26 4.811 51 2.205 76 1.312 2 10.203 27 4.661 52 2.145 77 1.295 3 9.897 28 4.515 53 2.088 78 1.280 4 9.597 29 4.371 54 2.034 79 1.265 5 9.301 30 4.231 55 1.982 80 1.251 6 9.007 31 4.094 56 1.933 81 1.238 7 8.718 32 3.962 57 1.886 82 1.225 8 8.433 33 3.834 58 1.841 83 1.213 9 8.153 34 3.710 59 1.798 84 1.202 10 7.879 35 3.590 60 1.757 85 1.191 11 7.613 36 3.475 61 1.717 86 1.182 12 7.356 37 3.363 62 1.680 87 1.173 13 7.109 38 3.256 63 1.644 88 1.164 14 6.876 39 3.153 64 1.610 89 1.155 15 6.654 40 3.054 65 1.577 90 1.147 16 6.456 41 2.959 66 1.547 91 1.138 17 6.269 42 2.869 67 1.518 92 1.129 18 6.091 43 2.782 68 1.490 93 1.120 19 5.919 44 2.698 69 1.464 94 1.109 20 5.752 45 2.619 70 1.438 95 1.097 21 5.590 46 2.542 71 1.414 96 1.083 22 5.430 47 2.469 72 1.391 97 1.069 23 5.272 48 2.399 73 1.369 98 1.054 24 5.117 49 2.331 74 1.349 99 1.040 100 1.000
THE POLICY'S BASE DEATH BENEFIT AT ANY TIME WILL BE AT LEAST EQUAL TO THE ACCOUNT VALUE TIMES THE APPROPRIATE FACTOR FROM THIS TABLE. ________________________________________________________________________________ 139 Strategic Advantage APPENDIX A (CONT.) Factors for the Cash Value Accumulation Test For a Life Insurance Policy FEMALE NONSMOKER
Attained Attained Attained Attained Age Factor Age Factor Age Factor Age Factor 0 14.687 25 6.861 50 3.013 75 1.493 1 14.680 26 6.638 51 2.920 76 1.461 2 14.279 27 6.421 52 2.831 77 1.430 3 13.873 28 6.211 53 2.745 78 1.401 4 13.471 29 6.007 54 2.662 79 1.373 5 13.073 30 5.809 55 2.583 80 1.347 6 12.682 31 5.618 56 2.507 81 1.322 7 12.294 32 5.432 57 2.433 82 1.299 8 11.915 33 5.252 58 2.362 83 1.278 9 11.541 34 5.078 59 2.293 84 1.257 10 11.175 35 4.910 60 2.226 85 1.239 11 10.817 36 4.747 61 2.162 86 1.221 12 10.469 37 4.590 62 2.100 87 1.205 13 10.132 38 4.439 63 2.040 88 1.190 14 9.807 39 4.294 64 1.983 89 1.176 15 9.494 40 4.154 65 1.928 90 1.163 16 9.192 41 4.019 66 1.876 91 1.150 17 8.899 42 3.890 67 1.826 92 1.137 18 8.617 43 3.765 68 1.778 93 1.125 19 8.344 44 3.645 69 1.732 94 1.112 20 8.078 45 3.530 70 1.688 95 1.098 21 7.821 46 3.419 71 1.645 96 1.084 22 7.571 47 3.312 72 1.604 97 1.069 23 7.327 48 3.208 73 1.565 98 1.054 24 7.091 49 3.109 74 1.528 99 1.040 100 1.000
THE POLICY'S BASE DEATH BENEFIT AT ANY TIME WILL BE AT LEAST EQUAL TO THE ACCOUNT VALUE TIMES THE APPROPRIATE FACTOR FROM THIS TABLE. ________________________________________________________________________________ 140 Strategic Advantage APPENDIX A (CONT.) Factors for the Cash Vcalue Accumulation Test For a Life Insurance Policy FEMALE SMOKER
Attained Attained Attained Attained Age Factor Age Factor Age Factor Age Factor 0 13.162 25 6.032 50 2.728 75 1.451 1 13.099 26 5.836 51 2.651 76 1.423 2 12.723 27 5.647 52 2.578 77 1.396 3 12.346 28 5.463 53 2.507 78 1.371 4 11.974 29 5.285 54 2.438 79 1.347 5 11.608 30 5.113 55 2.373 80 1.325 6 11.248 31 4.946 56 2.310 81 1.303 7 10.894 32 4.785 57 2.249 82 1.283 8 10.547 33 4.629 58 2.190 83 1.263 9 10.207 34 4.478 59 2.132 84 1.246 10 9.874 35 4.332 60 2.076 85 1.229 11 9.550 36 4.192 61 2.022 86 1.214 12 9.234 37 4.056 62 1.969 87 1.199 13 8.930 38 3.926 63 1.919 88 1.186 14 8.636 39 3.801 64 1.870 89 1.173 15 8.352 40 3.682 65 1.824 90 1.161 16 8.085 41 3.568 66 1.780 91 1.149 17 7.826 42 3.459 67 1.738 92 1.137 18 7.577 43 3.354 68 1.697 93 1.125 19 7.336 44 3.254 69 1.658 94 1.112 20 7.102 45 3.158 70 1.620 95 1.098 21 6.876 46 3.065 71 1.583 96 1.084 22 6.655 47 2.976 72 1.547 97 1.069 23 6.441 48 2.890 73 1.513 98 1.054 24 6.234 49 2.808 74 1.481 99 1.040 100 1.000
THE POLICY'S BASE DEATH BENEFIT AT ANY TIME WILL BE AT LEAST EQUAL TO THE ACCOUNT VALUE TIMES THE APPROPRIATE FACTOR FROM THIS TABLE. _______________________________________________________________________________ 141 Strategic Advantage APPENDIX A (CONT.) Factors for the Cash Value Accumulation Test For a Life Insurance Policy UNISEX 1 NONSMOKER
Attained Attained Attained Attained Age Factor Age Factor Age Factor Age Factor 0 12.574 25 6.095 50 2.671 75 1.396 1 12.681 26 5.904 51 2.589 76 1.372 2 12.341 27 5.717 52 2.509 77 1.349 3 11.996 28 5.533 53 2.433 78 1.328 4 11.655 29 5.354 54 2.360 79 1.307 5 11.316 30 5.179 55 2.290 80 1.288 6 10.979 31 5.008 56 2.223 81 1.270 7 10.644 32 4.843 57 2.159 82 1.253 8 10.311 33 4.682 58 2.097 83 1.236 9 9.982 34 4.527 59 2.038 84 1.221 10 9.660 35 4.376 60 1.982 85 1.207 11 9.345 36 4.231 61 1.928 86 1.195 12 9.041 37 4.091 62 1.877 87 1.183 13 8.750 38 3.955 63 1.828 88 1.172 14 8.476 39 3.825 64 1.781 89 1.161 15 8.218 40 3.699 65 1.736 90 1.151 16 7.973 41 3.577 66 1.694 91 1.141 17 7.740 42 3.461 67 1.654 92 1.131 18 7.517 43 3.348 68 1.615 93 1.120 19 7.301 44 3.240 69 1.579 94 1.109 20 7.091 45 3.136 70 1.544 95 1.097 21 6.886 46 3.036 71 1.511 96 1.083 22 6.684 47 2.939 72 1.480 97 1.069 23 6.484 48 2.847 73 1.450 98 1.054 24 6.288 49 2.757 74 1.422 99 1.040 100 1.000
THE POLICY'S BASE DEATH BENEFIT AT ANY TIME WILL BE AT LEAST EQUAL TO THE ACCOUNT VALUE TIMES THE APPROPRIATE FACTOR FROM THIS TABLE. ________________________________________________________________________________ 142 Strategic Advantage APPENDIX A (CONT.) Factors for the Cash Value Accumulation Test For a Life Insurance Policy UNISEX 1 SMOKER
Attained Attained Attained Attained Age Factor Age Factor Age Factor Age Factor 0 10.511 25 4.963 50 2.267 75 1.330 1 10.508 26 4.811 51 2.205 76 1.312 2 10.203 27 4.661 52 2.145 77 1.295 3 9.897 28 4.515 53 2.088 78 1.280 4 9.597 29 4.371 54 2.034 79 1.265 5 9.301 30 4.231 55 1.982 80 1.251 6 9.007 31 4.094 56 1.933 81 1.238 7 8.718 32 3.962 57 1.886 82 1.225 8 8.433 33 3.834 58 1.841 83 1.213 9 8.153 34 3.710 59 1.798 84 1.202 10 7.879 35 3.590 60 1.757 85 1.191 11 7.613 36 3.475 61 1.717 86 1.182 12 7.356 37 3.363 62 1.680 87 1.173 13 7.109 38 3.256 63 1.644 88 1.164 14 6.876 39 3.153 64 1.610 89 1.155 15 6.654 40 3.054 65 1.577 90 1.147 16 6.456 41 2.959 66 1.547 91 1.138 17 6.269 42 2.869 67 1.518 92 1.129 18 6.091 43 2.782 68 1.490 93 1.120 19 5.919 44 2.698 69 1.464 94 1.109 20 5.752 45 2.619 70 1.438 95 1.097 21 5.590 46 2.542 71 1.414 96 1.083 22 5.430 47 2.469 72 1.391 97 1.069 23 5.272 48 2.399 73 1.369 98 1.054 24 5.117 49 2.331 74 1.349 99 1.040 100 1.000
THE POLICY'S BASE DEATH BENEFIT AT ANY TIME WILL BE AT LEAST EQUAL TO THE ACCOUNT VALUE TIMES THE APPROPRIATE FACTOR FROM THIS TABLE. ________________________________________________________________________________ 143 Strategic Advantage APPENDIX A (CONT.) Factors for the Cash Value Accumulation Test For a Life Insurance Policy UNISEX 2 NONSMOKER
Attained Attained Attained Attained Age Factor Age Factor Age Factor Age Factor 0 12.943 25 6.234 50 2.733 75 1.418 1 13.032 26 6.037 51 2.649 76 1.392 2 12.683 27 5.845 52 2.568 77 1.368 3 12.327 28 5.657 53 2.490 78 1.345 4 11.975 29 5.473 54 2.415 79 1.323 5 11.626 30 5.294 55 2.343 80 1.303 6 11.278 31 5.120 56 2.275 81 1.283 7 10.934 32 4.950 57 2.209 82 1.265 8 10.593 33 4.786 58 2.146 83 1.247 9 10.256 34 4.627 59 2.085 84 1.231 10 9.926 35 4.474 60 2.027 85 1.216 11 9.604 36 4.325 61 1.972 86 1.202 12 9.292 37 4.182 62 1.918 87 1.190 13 8.994 38 4.043 63 1.868 88 1.178 14 8.710 39 3.910 64 1.819 89 1.166 15 8.443 40 3.782 65 1.773 90 1.155 16 8.188 41 3.658 66 1.729 91 1.144 17 7.945 42 3.539 67 1.687 92 1.133 18 7.712 43 3.424 68 1.647 93 1.122 19 7.487 44 3.314 69 1.609 94 1.110 20 7.267 45 3.208 70 1.573 95 1.097 21 7.053 46 3.106 71 1.538 96 1.084 22 6.843 47 3.007 72 1.506 97 1.069 23 6.637 48 2.912 73 1.475 98 1.054 24 6.433 49 2.821 74 1.445 99 1.040 100 1.000
THE POLICY'S BASE DEATH BENEFIT AT ANY TIME WILL BE AT LEAST EQUAL TO THE ACCOUNT VALUE TIMES THE APPROPRIATE FACTOR FROM THIS TABLE. ________________________________________________________________________________ 144 Strategic Advantage APPENDIX A (CONT.) Factors for the Cash Value Accumulation Test For a Life Insurance Policy UNISEX 2 SMOKER
Attained Attained Attained Attained Age Factor Age Factor Age Factor Age Factor 0 10.942 25 5.143 50 2.347 75 1.361 1 10.931 26 4.984 51 2.282 76 1.341 2 10.616 27 4.828 52 2.221 77 1.323 3 10.298 28 4.675 53 2.162 78 1.306 4 9.985 29 4.526 54 2.105 79 1.289 5 9.677 30 4.380 55 2.052 80 1.274 6 9.373 31 4.239 56 2.000 81 1.259 7 9.072 32 4.102 57 1.951 82 1.244 8 8.777 33 3.969 58 1.904 83 1.230 9 8.487 34 3.841 59 1.859 84 1.217 10 8.203 35 3.717 60 1.816 85 1.205 11 7.927 36 3.597 61 1.774 86 1.194 12 7.660 37 3.481 62 1.735 87 1.183 13 7.405 38 3.371 63 1.697 88 1.173 14 7.161 39 3.264 64 1.660 89 1.163 15 6.930 40 3.162 65 1.626 90 1.153 16 6.721 41 3.064 66 1.594 91 1.143 17 6.523 42 2.970 67 1.563 92 1.133 18 6.334 43 2.880 68 1.534 93 1.122 19 6.152 44 2.794 69 1.505 94 1.110 20 5.975 45 2.711 70 1.478 95 1.097 21 5.803 46 2.632 71 1.452 96 1.084 22 5.634 47 2.556 72 1.427 97 1.069 23 5.468 48 2.484 73 1.404 98 1.054 24 5.305 49 2.414 74 1.382 99 1.040 100 1.000
THE POLICY'S BASE DEATH BENEFIT AT ANY TIME WILL BE AT LEAST EQUAL TO THE ACCOUNT VALUE TIMES THE APPROPRIATE FACTOR FROM THIS TABLE. ________________________________________________________________________________ 145 Strategic Advantage APPENDIX B Factors for the Guideline Premium/Cash Value Corridor Test For a Life Insurance Policy
Attained Attained Attained Attained Age Factor Age Factor Age Factor Age Factor 0 2.50 25 2.50 50 1.85 75 1.05 1 2.50 26 2.50 51 1.78 76 1.05 2 2.50 27 2.50 52 1.71 77 1.05 3 2.50 28 2.50 53 1.64 78 1.05 4 2.50 29 2.50 54 1.57 79 1.05 5 2.50 30 2.50 55 1.50 80 1.05 6 2.50 31 2.50 56 1.46 81 1.05 7 2.50 32 2.50 57 1.42 82 1.05 8 2.50 33 2.50 58 1.38 83 1.05 9 2.50 34 2.50 59 1.34 84 1.05 10 2.50 35 2.50 60 1.30 85 1.05 11 2.50 36 2.50 61 1.28 86 1.05 12 2.50 37 2.50 62 1.26 87 1.05 13 2.50 38 2.50 63 1.24 88 1.05 14 2.50 39 2.50 64 1.22 89 1.05 15 2.50 40 2.50 65 1.20 90 1.05 16 2.50 41 2.43 66 1.19 91 1.04 17 2.50 42 2.36 67 1.18 92 1.03 18 2.50 43 2.29 68 1.17 93 1.02 19 2.50 44 2.22 69 1.16 94 1.01 20 2.50 45 2.15 70 1.15 95 1.00 21 2.50 46 2.09 71 1.13 96 1.00 22 2.50 47 2.03 72 1.11 97 1.00 23 2.50 48 1.97 73 1.09 98 1.00 24 2.50 49 1.91 74 1.07 99 1.00 100 1.00
THE POLICY'S BASE DEATH BENEFIT AT ANY TIME WILL BE AT LEAST EQUAL TO THE ACCOUNT VALUE TIMES THE APPROPRIATE FACTOR FROM THIS TABLE. ________________________________________________________________________________ 146 Strategic Advantage APPENDIX C PERFORMANCE INFORMATION The following hypothetical illustrations demonstrate how the actual investment experience of each Division of the Variable Account affects the Cash Surrender Value, Account Value and Death Benefit of a Policy. These hypothetical illustrations are based on the actual historical return of each Portfolio as if a Policy had been issued on the date indicated. Past performance is no indication of future performance. Each Portfolio's Annual Total Return is based on the total return calculated for each fiscal year. These Annual Total Return figures reflect the Portfolio's management fees and other operating expenses but do not reflect the Policy level or Variable Account asset based charges and deductions, which if reflected, would result in lower total return figures than those shown. The illustrations are based on the payment of a $5,750 annual premium, paid at the beginning of each year, for a hypothetical fully-underwritten Policy with a $300,000 face amount, the Cash Value Accumulation Test, death benefit Option 1, issued to a standard, nonsmoker male, Age 45. In each case, it is assumed that all premiums are allocated to the Division illustrated for the period shown. The benefits are calculated for a specific date. The amount and timing of Premium Payments and the use of other Policy features, such as Policy Loans, would affect individual Policy benefits. The amounts shown for the Cash Surrender Values, Account Values and Death Benefits take into account the charges against premiums, current cost of insurance and monthly deductions, the daily charge against the Variable Account for mortality and expense risks, and each Portfolio's charges and expenses. See CHARGES, DEDUCTIONS AND REFUNDS, page 37. This prospectus also contains illustrations based on assumed rates of return. See ILLUSTRATIONS OF DEATH BENEFITS, ACCOUNT VALUES AND SURRENDER VALUES, AND ACCUMULATED PREMIUMS, page 57. ________________________________________________________________________________ 147 Strategic Advantage HYPOTHETICAL ILLUSTRATIONS Nonsmoker Male Age 45 Cash Value Accumulation Test Standard Risk Class Death Benefit Option 1 Stated Death Benefit $300,000 Annual Premium $5,750 - -------------------------------------------------------------------------------- NEUBERGER & BERMAN AMT LIMITED MATURITY BOND PORTFOLIO
Year Annual Total Cash Surrender Account Death Ended: Return* Value Value Benefit 12/31/87 2.89% 4,700 4,412 300,000 12/31/88 7.17% 9,212 9,068 300,000 12/31/89 10.77% 14,313 14,313 300,000 12/31/90 8.32% 19,538 19,538 300,000 12/31/91 11.34% 25,876 25,876 300,000 12/31/92 5.18% 31,452 31,452 300,000 12/31/93 6.63% 37,795 37,795 300,000 12/31/94 (0.15)% 41,610 41,610 300,000 12/31/95 10.94% 50,437 50,437 300,000 12/31/96 4.31% 56,480 56,480 300,000
NEUBERGER & BERMAN AMT GOVERNMENT INCOME PORTFOLIO
Year Annual Total Cash Surrender Account Death Ended: Return* Value Value Benefit 12/31/95 11.76% 5,111 4,823 300,000 12/31/96 1.32% 9,106 8,962 300,000
________________________________________________________________________________ 148 Strategic Advantage NEUBERGER & BERMAN AMT GOVERNMENT INCOME PORTFOLIO
Year Annual Total Cash Surrender Account Death Ended: Returns* Value Value Benefit 12/31/87 (4.89)% 4,340 4,052 300,000 12/31/88 25.97% 10,436 10,293 300,000 12/31/89 29.47% 18,407 18,407 300,000 12/31/90 (8.19)% 20,213 20,213 300,000 12/31/91 29.73% 31,130 31,130 300,000 12/31/92 9.54% 38,513 38,513 300,000 12/31/93 6.79% 45,367 45,367 300,000 12/31/94 (4.99)% 46,732 46,732 300,000 12/31/95 31.73% 66,747 66,747 300,000 12/31/96 9.14% 76,879 76,879 300,000
The assumptions underlying these values are described in Performance Information, page 175. * These Annual Total Return figures reflect the Portfolio's management fees and other operating expenses but do not reflect the Policy level or Variable Account asset based charges and deductions, which if reflected, would result in lower total return figures than those shown. ________________________________________________________________________________ 149 Strategic Advantage HYPOTHETICAL ILLUSTRATION (Continued) Nonsmoker Male Age 45 Cash Value Accumulation Test Standard Risk Class Death Benefit Option 1 Stated Death Benefit $300,000 Annual Premium $5,750 - -------------------------------------------------------------------------------- NEUBERGER & BERMAN AMT PARTNERS PORTFOLIO
Year Annual Total Cash Surrender Account Death Ended: Return* Value Value Benefit 12/31/95 36.47% 6,260 5,972 300,000 12/31/96 29.57% 13,219 13,076 300,000 - ------------------------------------------------------------------------------------
ALGER AMERICAN SMALL CAPITALIZATION PORTFOLIO
Year Annual Total Cash Surrender Account Death Ended: Return* Value Value Benefit 12/31/89 64.48% 7,567 7,280 300,000 12/31/90 8.71% 12,451 12,307 300,000 12/31/91 57.54% 25,695 25,695 300,000 12/31/92 3.55% 30,392 30,392 300,000 12/31/93 13.28% 38,585 38,585 300,000 12/31/94 (4.38)% 40,650 40,650 300,000 12/31/95 44.31% 64,597 64,597 300,000 12/31/96 4.18% 71,267 71,267 300,000 - ------------------------------------------------------------------------------------
ALGER AMERICAN MIDCAP GROWTH PORTFOLIO
Year Annual Total Cash Surrender Account Death Ended: Return* Value Value Benefit 12/31/94 (1.54)% 4,495 4,207 300,000 12/31/95 44.45% 12,244 12,100 300,000 12/31/96 11.90% 17,843 17,843 300,000 - ------------------------------------------------------------------------------------
ALGER AMERICAN GROWTH PORTFOLIO
Year Annual Total Cash Surrender Account Death Ended: Return* Value Value Benefit 12/31/90 4.14% 4,757 4,470 300,000 12/31/91 40.39% 12,256 12,112 300,000 12/31/92 12.38% 17,936 17,936 300,000 12/31/93 22.47% 26,593 26,593 300,000 12/31/94 1.45% 30,651 30,651 300,000 12/31/95 36.37% 47,446 47,446 300,000 12/31/96 13.35% 58,279 58,279 300,000 - ------------------------------------------------------------------------------------
The assumptions underlying these values are described in Performance Information, page 175. ________________________________________________________________________________ 150 Strategic Advantage * These Annual Total Return figures reflect the Portfolio's management fees and other operating expenses but do not reflect the Policy level or Variable Account asset based charges and deductions, which if reflected, would result in lower total return figures than those shown. ________________________________________________________________________________ 151 Strategic Advantage HYPOTHETICAL ILLUSTRATION (Continued) Nonsmoker Male Age 45 Cash Value Accumulation Test Standard Risk Class Death Benefit Option 1 Stated Death Benefit $300,000 Annual Premium $5,750 - -------------------------------------------------------------------------------- ALGER AMERICAN LEVERAGED ALL CAP
Year Annual Total Cash Surrender Account Death Ended: Return* Value Value Benefit 12/31/96 12.04% 5,123 4,836 300,000 -------------------------------------------------------------------------------------
FIDELITY VIP GROWTH PORTFOLIO
Year Annual Total Cash Surrender Account Death Ended: Return* Value Value Benefit 12/31/87 3.66% 4,735 4,448 300,000 12/31/88 15.58% 10,002 9,858 300,000 12/31/89 31.51% 18,137 18,137 300,000 12/31/90 (11.73)% 19,175 19,175 300,000 12/31/91 45.51% 33,494 33,494 300,000 12/31/92 9.32% 41,010 41,010 300,000 12/31/93 19.37% 53,751 53,751 300,000 12/31/94 (0.02)% 57,563 57,563 300,000 12/31/95 35.36% 83,220 83,220 300,000 12/31/96 14.71% 99,683 99,683 300,000 - -------------------------------------------------------------------------------------
FIDELITY VIP OVERSEAS PORTFOLIO
Year Annual Total Cash Surrender Account Death Ended: Return* Value Value Benefit 12/31/88 8.13% 4,943 4,655 300,000 12/31/89 26.28% 11,220 11,076 300,000 12/31/90 (1.67)% 14,608 14,608 300,000 12/31/91 8.00% 19,797 19,797 300,000 12/31/92 (10.72)% 20,858 20,858 300,000 12/31/93 37.35% 34,391 34,391 300,000 12/31/94 1.72% 39,007 39,007 300,000 12/31/95 9.74% 47,117 47,117 300,000 12/31/96 13.15% 57,667 57,667 300,000 - -------------------------------------------------------------------------------------
The assumptions underlying these values are described in Performance Information page 175. * These Annual Total Return figures reflect the Portfolio's management fees and other operating expenses but do not reflect the Policy level or Variable Account asset based charges and deductions, which if reflected, would result in lower total return figures than those shown. ________________________________________________________________________________ 152 Strategic Advantage HYPOTHETICAL ILLUSTRATION (Continued) ------------------------------------- Nonsmoker Male Age 45 Cash Value Accumulation Test Standard Risk Class Death Benefit Option 1 Stated Death Benefit $300,000 Annual Premium $5,750 FIDELITY VIP MONEY MARKET PORTFOLIO
Year Annual Total Cash Surrender Account Death Ended: Return* Value Value Benefit 12/31/87 6.44% 4,864 4,576 300,000 12/31/88 7.39% 9,407 9,263 300,000 12/31/89 9.12% 14,303 14,303 300,000 12/31/90 8.04% 19,476 19,476 300,000 12/31/91 6.09% 24,560 24,560 300,000 12/31/92 3.90% 29,700 29,700 300,000 12/31/93 3.23% 34,770 34,770 300,000 12/31/94 4.25% 40,327 40,327 300,000 12/31/95 5.87% 46,748 46,748 300,000 12/31/96 5.41% 53,205 53,205 300,000
FIDELITY VIP II ASSET MANAGER PORTFOLIO
Year Annual Total Cash Surrender Account Death Ended: Return* Value Value Benefit 12/31/90 6.72% 4,877 4,589 300,000 12/31/91 22.56% 10,799 10,655 300,000 12/31/92 11.71% 16,205 16,205 300,000 12/31/93 21.23% 24,227 24,227 300,000 12/31/94 (6.09)% 26,115 26,115 300,000 12/31/95 16.96% 35,319 35,319 300,000 12/31/96 14.60% 45,081 45,081 300,000 - -------------------------------------------------------------------------------------
________________________________________________________________________________ 153 Strategic Advantage FIDELITY VIP II INDEX 500 PORTFOLIO
Year Annual Total Cash Surrender Account Death Ended: Return* Value Value Benefit 12/31/93 9.74% 5,017 4,729 300,000 12/31/94 1.04% 8,986 8,842 300,000 12/31/95 37.19% 17,559 17,559 300,000 12/31/96 22.82% 26,210 26,210 300,000 - -------------------------------------------------------------------------------------
INVESCO VIF TOTAL RETURN PORTFOLIO
Year Annual Total Cash Surrender Account Death Ended: Return* Value Value Benefit 12/31/95 22.79% 5,623 5,335 300,000 12/31/96 12.18% 10,688 10,544 300,000
The assumptions underlying these values are described in Performance Information, page 175. * These Annual Total Return figures reflect the Portfolio's management fees and other operating expenses but do not reflect the Policy level or Variable Account asset based charges and deductions, which if reflected, would result in lower total return figures than those shown. ________________________________________________________________________________ 154 Strategic Advantage HYPOTHETICAL ILLUSTRATION (Continued) Nonsmoker Male Age 45 Cash Value Accumulation Test Standard Risk Class Death Benefit Option 1 Stated Death Benefit $300,000 Annual Premium $5,750 - -------------------------------------------------------------------------------- INVESCO VIF INDUSTRIAL INCOME PORTFOLIO
Year Annual Total Cash Surrender Account Death Ended: Return* Value Value Benefit 12/31/95 29.25% 5,923 5,636 300,000 12/31/96 22.28% 12,047 11,903 300,000
INVESCO VIF HIGH YIELD PORTFOLIO
Year Annual Total Cash Surrender Account Death Ended: Return* Value Value Benefit 12/31/95 19.76% 5,482 5,194 300,000 12/31/96 16.59% 10,958 10,814 300,000
INVESCO VIF UTILITIES PORTFOLIO
Year Annual Total Cash Surrender Account Death Ended: Return* Value Value Benefit 12/31/96 12.76% 10,031 9,887 300,000
________________________________________________________________________________ 155 Strategic Advantage 12/31/96 12.76% 10,031 9,887 300,000 VAN ECK WORLDWIDE HARD ASSETS FUND (FORMERLY GOLD AND NATURAL RESOURCES FUND)
Year Annual Total Cash Surrender Account Death Ended: Return* Value Value Benefit 12/31/91 (2.93)% 4,430 4,143 300,000 12/31/92 (4.09)% 7,954 7,810 300,000 12/31/93 64.83% 19,533 19,533 300,000 12/31/94 (4.78)% 22,054 22,054 300,000 12/31/95 10.99% 28,574 28,574 300,000 12/31/96 18.04% 38,542 38,542 300,000
VAN ECK WORLDWIDE BALANCED FUND
Year Annual Total Cash Surrender Account Death Ended: Return* Value Value Benefit 12/31/95 (-0.10)% 4,561 4,274 300,000 12/31/96 11.63% 9,455 9,311 300,000
The assumptions underlying these values are described in Performance Information, page 175. * The Annual Total Return figures reflect the Portfolio's management fees and other operating expenses but do not reflect the Policy level or Variable Account asset based charges and deductions, which if reflected, would result in lower total return figures than those shown. ________________________________________________________________________________ 156 Strategic Advantage PART II UNDERTAKING TO FILE REPORTS Incorporated herein by reference to Pre-Effective Amendment No. 1 to the Form S- 6 Registration Statement of Security Life of Denver Insurance Company and its Security Life Separate Account L1, filed with the Securities and Exchange Commission on August 4, 1995 (File No. 33-88148). UNDERTAKING REGARDING INDEMNIFICATION Incorporated herein by reference to Pre-Effective Amendment No. 1 to the Form S- 6 Registration Statement of Security Life of Denver Insurance Company and its Security Life Separate Account L1, filed with the Securities and Exchange Commission on August 4, 1995 (File No. 33-88148). UNDERTAKING REQUIRED BY SECTION 26(e)(2)(A) OF THE INVESTMENT COMPANY ACT OF 1940, AS AMENDED Security Life of Denver Insurance Company represents that the fees and charges deducted under the Policy, in the aggregate, are reasonable in relation to the services rendered, the expenses expected to be incurred and the risks assumed by the Company. CONTENTS OF REGISTRATION STATEMENT This Registration Statement comprises the following papers and documents: The facing sheet. Cross-Reference table The prospectus. The undertaking to file reports. The undertaking regarding indemnification. The undertaking required by Section 26(e)(2)(A) of the Investment Company Act of 1940, as amended. The signatures. Written consents of the following persons: Shirley A. Knarr (See Exhibit 6) Ernst & Young LLP (See Exhibit 7) ________________________________________________________________________________ Strategic Advantage II-1 The following exhibits: 1.A. (1) Resolution of the Executive Committee of the Board of Directors of Security Life of Denver Insurance Company ("Security Life of Denver") authorizing the establishment of the Registrant. 1/ (2) Not applicable (3) (a) Security Life of Denver Distribution Agreement. 2/ (b) Specimen Broker/Dealer Supervisory and Selling Agreement for Variable Contracts 3/, and Compensation Schedule. 1/ (i) Broker/Dealer Supervisory and Selling Agreement for Variable Contracts with Paine Webber Incorporated (c) Commission Schedule for Policies 1/ (4) Not Applicable (5) (a) Specimen Variable Universal Life Insurance Policy (Form No. 1197 (VUL)) (i) Specimen Variable Universal Life Insurance Policy issued in Maryland. (Form No. 1197 (VUL)-MD-5/97) (ii) Specimen Variable Universal Life Insurance Policy issued in Massachusetts. (Forms No. 1197 (VUL)-MA- 5/97) (iii) Specimen Variable Universal Life Insurance Policy issued in Texas. (Form No. 1197 (VUL)-TX-5/97) (b) Adjustable Term Insurance Rider (Form No. R2000-3/96). (6) (a) Security Life of Denver's Restated Articles of Incorporation. 1/ (b-g) Amendments to Articles of Incorporation through June 12, 1987. 4/ (h) Security Life of Denver's By-Laws. 1/ (7) Not Applicable ________________________________________________________________________________ Strategic Advantage II-2 (8) (a) Participation Agreements 3/ and Addendum to Sales Agreement. 1/ (b) Amendments to Participation Agreements. 1/ (c) Service Agreement. 1/ (d) Administrative Services Agreement between Security Life of Denver and Financial Administrative Services Corporation. 2/ (e) Amendment to Administrative Services Agreement between Security Life of Denver and Financial Administrative Services Corporation. 5/ (9) Not Applicable (a) Specimen Flexible Premium Variable Life Insurance Application (Form No. Q-115).1/ (b) Specimen Flexible Premium Variable Life Insurance Guaranteed Issue Application (Form No. Q-115695).1/ 2. Included as Exhibit 1.A(5) above. 3. (a) Opinion and Consent of Eugene L. Copeland as to securities being registered.1/ 4. Not Applicable 5. Not Applicable 6. Opinion and Consent of Shirley A. Knarr. 7. Consent of Ernst & Young LLP 8. Powers of Attorney. ________________________________________________________________________________ Strategic Advantage II-3 9. Financial Data Schedule _____________ 1/ Incorporated herein by reference to Pre-Effective Amendment No. 1 to the Form S-6 Registration Statement of Security Life of Denver Insurance Company and its Security Life Separate Account L1, filed with the Securities and Exchange Commission on August 4, 1995 (File No. 33-88148). 2/ Incorporated herein by reference to Pre-Effective Amendment No. 1 to the Form N-4 Registration Statement of Security Life of Denver Insurance Company and its Security Life Separate Account A1, filed with the Securities and Exchange Commission on February 21, 1995 (File No. 33- 72564). 3/ Incorporated herein by reference to Pre-Effective Amendment No. 2 to the Form S-6 Registration Statement of Security Life of Denver Insurance Company and its Security Life Separate Account L1, filed with the Securities and Exchange Commission on October 25, 1994 (File No. 33-74190) 4/ Incorporated herein by reference to the Form N-4 Registration Statement of Security Life of Denver and its Security Life Separate Account A1, filed with the Securities and Exchange Commission on December 3, 1993 (File No. 33-72564). 5/ Incorporated herein by reference to Post-Effective Amendment No. 2 to the Form N-4 Registration Statement of Security Life of Denver Insurance Company and its Security Life Separate Account A1, filed with the Securities and Exchange Commission on April 28, 1995 (File No. 33-78444). 6/ Incorporated herein by reference to Pre-Effective Amendment No. 1 to the Form S-6 Registration Statement of Security Life of Denver Insurance Company and its Security Life Separate Account L1, filed with the Securities and Exchange Commission on August 31, 1994 (File No. 33-74190). ________________________________________________________________________________ Strategic Advantage II-4 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, Security Life of Denver Insurance Company and the Registrant, Security Life Separate Account L1, certify that they meet the requirements of Securities Act Rule 485(b) for effectiveness of Post-Effective Amendment No. 2 to the Registration Statement, and have duly caused this Post-Effective Amendment No. 2 to the Registration Statement to be signed on their behalf by the undersigned, thereunto duly authorized, and their seal to be hereunto fixed and attested, all in the City and County of Denver and the State of Colorado on the 29th day of April, 1997. SECURITY LIFE OF DENVER INSURANCE COMPANY (Depositor) BY: /s/: Stephen M. Christopher -------------------------------------- Stephen M. Christopher President and Chief Operating Officer (Seal) ATTEST: /s/: Gary W. Waggoner --------------------- SECURITY LIFE SEPERATE ACCOUNT L1 (Registrant) By: SECURITY LIFE OF DENVER INSURANCE COMPANY (Depositor) BY: /s/: Stephen M. Christopher --------------------------------- Stephen M. Christopher President and Chief Operating Officer (Seal) ATTEST: /s/: Gary W. Waggoner - --------------------- Gary W. Waggoner Pursuant to the requirements of the Securities Act of 1933, this Post-Effective Amendment No. 2 to the Registration Statement has been signed below by the following persons in the capacities with Security Life of Denver Insurance Company and on the date indicated. PRINCIPAL EXECUTIVE OFFICERS: /s/: R. Glenn Hilliard - ---------------------------------------------- R. Glenn Hilliard Chief Executive Officer /s/: Stephen M. Christopher - ---------------------------------------------- Stephen M. Christopher President and Chief Operating Officer PRINCIPAL FINANCIAL OFFICER /s/: Stephen J. Yarina - ---------------------------------------------- Stephen J. Yarina Senior Vice President, Treasurer and Chief Financial Officer PRINCIPAL ACCOUNTING OFFICER: /s/ Stephen J. Yarina - ---------------------------------------------- Stephen J. Yarina Senior Vice President, Treasurer and Chief Financial Officer DIRECTORS: /s/: R. Glenn Hilliard (Chairman)* - --------------------------------------------- R. Glenn Hilliard /s/: Thomas F. Conroy* - ---------------------------------------------- Thomas F. Conroy /s/: Michael W. Cunningham* - ---------------------------------------------- Michael W. Cunningham /s/: Linda B. Emory* - ---------------------------------------------- Linda B. Emory /s/: Stephen M. Christopher* - ---------------------------------------------- Stephen M. Christopher * By: /s/: Edward K. Campbell --------------------------------- Attorney-in-Fact April 29, 1997 EXHIBIT INDEX ------------- Exhibit No. Description of Exhibit - ----------- ---------------------- 1.A(1) Resolution of the Executive Committee of the Board of Directors of Security Life of Denver Insurance Company ("Security Life of Denver") authorizing the establishment of the Registrant./1/ 1.A(2) Not Applicable. 1.A(3)(a) Security Life of Denver Distribution Agreement./2/ 1.A(3)(b) Specimen Broker/Dealer Supervisory and Selling Agreement for Variable Contracts/3/, and Compensation Schedule./1/ 1.A(3)(b)(i) Broker/Dealer Supervisory and Selling Agreement for Variable Contracts with Paine Webber Incorporated. 1.A(3)(c) Commission Schedule for Policies./1/ 1.A(4) Not Applicable. 1.A(5)(a) Specimen Variable Universal Life Insurance Policy (Form No. 1197)(VUL)). - --------------------- /1/ Incorporated herein by reference to Pre-Effective Amendment No. 1 of the Form S-6 Registration Statement of Security Life of Denver Insurance Company and its Security Life Separate Account L1, filed with the Securities and Exchange Commission on August 4, 1995 (File No. 33-88148). /2/ Incorporated herein by reference to Pre-Effective Amendment No. 1 of the Form N-4 Registration Statement of Security Life of Denver Insurance Company and its Security Life Separate Account A1, filed with the Securities and Exchange Commission on February 21, 1995 (File No. 33-72564). /3/ Incorporated herein by reference to Pre-Effective Amendment No. 2 of the Form S-6 Registration Statement of Security Life of Denver Insurance Company and its Security Life Separate Account L1, filed with the Securities and Exchange Commission on October 25, 1994 (File No. 33-74190). Exhibit No. Description of Exhibit - ----------- ---------------------- 1.A(5)(a)(i) Specimen Variable Universal Life Insurance Policy issued in Maryland (Form No. 1197)(VUL)-MD-5/97). 1.A(5)(a)(ii) Specimen Variable Universal Life Insurance Policy issued in Massachusetts (Form No. 1197)(VUL)-MA-5/97). 1.A(5)(a)(iii) Specimen Variable Universal Life Insurance Policy issued in Texas (Form No. 1197)(VUL)-TX-5/97). 1.A(5)(b) Adjustable Term Insurance Rider (Form No. R2000-3/96). 1.A(6)(a) Security Life of Denver's Restated Articles of Incorporation./1/ 1.A(6)(b-g) Amendments to Articles of Incorporation through June 12, 1987./4/ 1.A(6)(h) Security Life of Denver's By-Laws./1/ 1.A(7) Not Applicable. 1.A(8)(a) Participation Agreements/1/ and Addendum to Sales Agreement./1/ 1.A(8)(b) Amendment to Participation Agreements./1/ 1.A(8)(c) Service Agreement./1/ 1.A(8)(d) Administrative Services Agreement between Security Life of Denver and Financial Administrative Services Corporation./2/ 1.A(8)(e) Amendments to Administrative Services Agreement between Security Life of Denver and Financial Administrative Services Corporation./3/ 1.A(9) Not Applicable. - -------------------------- /4/ Incorporated herein by reference to the Form N-4 Registration Statement of Security Life of Denver and its Security Life Separate Account A1, filed with the Securities and Exchange Commission on December 3, 1993 (File No. 33-72564). Exhibit No. Description of Exhibit - ----------- ---------------------- 1.A(9)(a) Specimen Flexible Premium Variable Life Insurance Application (Form No. Q-115)./1/ 1.A(9)(b) Specimen Flexible Premium Variable Life Insurance Guaranteed Issue Application (Form No. Q-115695)./1/ 2 Included as Exhibit 1.A(5) above. 3(a) Opinion and Consent of Eugene L. Copeland as to securities being registered./1/ 4 Not Applicable. 5 Not Applicable. 6 Opinion and Consent of Shirley A. Knarr. 7 Consent of Ernst & Young LLP. 8 Powers of Attorney. 9 Financial Data Schedule (Exhibit 27 For purposes of electronic filing). EX-1.A(3)(B)(I) 2 EXHIBIT 1.A (3) (B) (I) EXHIBIT 1.A(3)(b)(i) BROKER-DEALER SUPERVISORY AND SELLING AGREEMENT FOR VARIABLE CONTRACTS This Broker-Dealer Supervisory and Selling Agreement (the "Agreement") is made this 18th day of April, 1997, by and among the "INSURER" (either SECURITY LIFE OF DENVER INSURANCE COMPANY "SECURITY LIFE" or FIRST ING LIFE INSURANCE COMPANY OF NEW YORK "FIRST ING", whichever is the issuer of the Contracts), ING AMERICA EQUITIES, INC. ("ING AMERICA EQUITIES"), a broker-dealer registered with the Securities and Exchange Commission ("SEC") under the Securities Act of 1934 (the "1934 Act") and a member of the National Association of Securities Dealers, Inc. ("NASD"), PAINEWEBBER INCORPORATED ("SELLING BROKER-DEALER"), also a broker- dealer registered with the SEC under the 1934 Act and a member of the NASD, and any insurance AGENCY subsidiaries or affiliates ("AGENCY or AGENCIES") of SELLING BROKER-DEALER, as listed on the signature pages of this Agreement. RECITALS WHEREAS, the INSURER issues certain variable life insurance policies and variable annuity contracts (the "Contracts") and offers for sale such Contracts in accordance with federal securities laws and the applicable laws of those states in which the Contracts have been qualified for sale; and WHEREAS, the INSURER has authorized ING AMERICA EQUITIES, as principal underwriter and distributor of the Contracts, to enter into agreements, subject to the consent of the INSURER, with SELLING BROKER-DEALERS and the AGENCIES for the distribution of the Contracts; and WHEREAS, SELLING BROKER-DEALER and the AGENCIES wish to participate in the distribution of the Contracts, which are deemed to be securities under the Securities Act of 1933 (the "1933 Act"); and WHEREAS, SELLING BROKER-DEALER has registered representatives ("Representatives") who are also licensed and appointed as life insurance agents of the INSURER, who will solicit and sell the Contracts; and WHEREAS, SELLING BROKER-DEALER proposes to undertake certain supervisory and administrative obligations described below in connection with the distribution of the Contracts; and WHEREAS, the INSURERS and ING AMERICA EQUITIES have entered into a wholesaling or similar marketing support agreement with the broker-dealers designated in Exhibit A, attached hereto and hereby incorporated herein by reference (the "Marketing Support Broker-Dealer"), as such Exhibit A may be amended from time to time, whereby Marketing Support 1 Broker-Dealer has agreed to provide certain marketing, sales or administrative support services to the registered representatives of the SELLING BROKER-DEALER in support of SELLING BROKER-DEALER'S responsibilities hereunder in connection with the offer and sale of the Contracts described herein. AGREEMENTS NOW THEREFORE, in consideration of the mutual covenants contained herein, the parties agree as follows: 1. RELATIONSHIP OF PARTIES. The INSURER is the INSURER and issuer of ----------------------- Contracts covered by this Agreement. ING AMERICA EQUITIES is the principal underwriter and distributor of the Contracts. SELLING BROKER-DEALER represents that it is a registered broker-dealer under the 1934 Act and a member of the NASD. The INSURER hereby appoints the AGENCIES under the insurance laws and the INSURER and ING AMERICA EQUITIES authorize the SELLING BROKER-DEALER under the securities laws to distribute the Contracts. SELLING BROKER-DEALER agrees to supervise the Representatives in connection with the distribution, solicitation and sale of the Contracts and to perform other services as described below. 2. AUTHORITY AND DUTIES OF SELLING BROKER-DEALER. SELLING BROKER-DEALER --------------------------------------------- agrees that it shall, at all times when performing its functions under this Agreement, be registered as a securities broker-dealer with the SEC and will maintain its membership with the NASD, and shall be licensed or registered as a securities broker-dealer in the states that require such licensing or registration in connection with supervision and other services pertaining to Contract sales activities. SELLING BROKER-DEALER shall distribute the Contracts and agrees that it shall have all the attendant duties, responsibilities and liabilities associated with that function, for compliance, supervision and servicing purposes. SELLING BROKER-DEALER agrees to use its best efforts from time to time to find suitable purchasers for the Contracts. a) SELECTION AND SUPERVISION OF REPRESENTATIVES. SELLING BROKER-DEALER -------------------------------------------- shall select and employ Representatives and shall have full responsibility for the training, supervision and control of such Representatives as contemplated by Section 15(b)(4)(E) of the 1934 Act and applicable NASD Rules. Such Representatives shall be subject to the control of SELLING BROKER-DEALER with respect to such persons' securities-regulated activities in connection with the Contracts. SELLING BROKER-DEALER shall cause such Representatives to be NASD registered representatives and appropriately licensed with SELLING BROKER-DEALER before such Representatives engage in the solicitation of applications for the Contracts and shall cause such Representatives to limit solicitation of applications for the Contracts to jurisdictions where such Representatives are licensed and where the INSURER has authorized solicitations of its Contracts. SELLING BROKER-DEALER agrees that it will permit only its Representatives who are appointed with the INSURER to solicit and sell the Contracts. 2 The INSURER and ING AMERICA EQUITIES shall not have any responsibility for the supervision of any Representative or any other associated person or affiliate of SELLING BROKER-DEALER. If the act or omission of a Representative or any other associated person or affiliate of SELLING BROKER-DEALER is the proximate cause of any claim, damage or liability (including reasonable attorneys' fees) to the INSURER or ING AMERICA EQUITIES, SELLING BROKER-DEALER shall be entirely responsible and liable therefor. b) NOTICE OF REPRESENTATIVE'S NONCOMPLIANCE. In the event a ---------------------------------------- Representative fails or refuses to submit to supervision of SELLING BROKER- DEALER, ceases to be a Representative of SELLING BROKER-DEALER, or fails to meet the rules and standards imposed by SELLING BROKER-DEALER on its Representatives, SELLING BROKER-DEALER shall certify such fact to the INSURER in writing immediately, and shall immediately notify such Representative that he or she is no longer authorized to sell the Contracts. c) COMPLIANCE WITH NASD RULES OF FAIR PRACTICE AND FEDERAL AND STATE ----------------------------------------------------------------- SECURITIES LAWS. SELLING BROKER-DEALER shall fully comply with the requirements - --------------- of the 1934 Act and all other applicable federal or state laws and with the rules of the NASD and shall establish such rules and procedures as may be necessary to cause reasonable supervision of the securities activities of Representatives. SELLING BROKER-DEALER agrees to maintain appropriate books, records and supervisory procedures as are required by the SEC, NASD and other regulatory agencies having jurisdiction. d) PURCHASER SUITABILITY. SELLING BROKER-DEALER shall be responsible for --------------------- suitability and shall take reasonable steps to ensure that its Representatives shall not make recommendations to applicants to purchase Contracts in the absence of reasonable grounds to believe the purchase of each Contract is suitable for the applicant. SELLING BROKER-DEALER shall promptly forward to the INSURER'S Customer Service Center all applications, together with any payments received with the applications, without deduction or reduction unless otherwise agreed in writing. The INSURER reserves the right to reject any Contract application and return any payment made in connection with an application which is rejected. Unless otherwise agreed, Contracts issued on applications accepted by the INSURER shall be forwarded to the Representative of SELLING BROKER-DEALER for delivery to the Contract owner. e) PROSPECTUS AND STATEMENT OF ADDITIONAL INFORMATION. ING AMERICA -------------------------------------------------- EQUITIES shall provide SELLING BROKER-DEALER with prospectuses and any supplements or amendments thereto, and the Statement of Additional Information ("SAI") describing the Contracts subject to this Agreement as required by law or regulation. The INSURER is responsible for maintaining in effect, in accordance with the requirements of the SEC, each Registration Statement of which the prospectus is part. The INSURER shall immediately notify SELLING BROKER-DEALER of the issuance of any stop order or any federal or state regulatory proceeding which would prevent the sale of their respective Contracts in any state or jurisdiction. SELLING BROKER-DEALER shall ensure compliance with the prospectus delivery 3 requirements of the 1933 Act. SELLING BROKER-DEALER agrees to deliver a copy of the SAI concurrently with a copy of the prospectus to all California Contract applicants and to Contract applicants in other jurisdictions where such delivery may be required so long as said SAI is delivered to Selling Broker-Dealer by Insurer with written instructions on which states said SAI is required to accompany the prospectus. f) ADVERTISING AND SALES PROMOTION MATERIALS. SELLING BROKER-DEALER ----------------------------------------- shall perform the selling functions required by this Agreement only in accordance with the terms and conditions of the then current prospectus applicable to the Contracts and shall make no representations not included in the prospectus or in any authorized supplemental material, including illustrations. SELLING BROKER-DEALER warrants that only advertising and sales materials, including illustrations, approved by the INSURER and ING AMERICA EQUITIES will be used by its Representatives in the solicitation and sale of the Contracts. g) SECURING APPLICATION. Each application for a Contract shall be made -------------------- on an application form provided by the INSURER and all payments collected by SELLING BROKER-DEALER or any of its Representatives shall be remitted promptly in full, together with such application form and any other required documentation directly to the INSURER at the address indicated on such application or to such other address as may be Selling by the INSURER. All such payments and documents shall be the property of the INSURER. SELLING BROKER- DEALER shall review all such applications for completeness and for compliance with the conditions herein including the suitability and prospectus delivery requirements set forth above under Sections 2(d) and (e). Check or money order in payment of such Contracts should be made payable to the order of SECURITY LIFE or FIRST ING, whichever is the issuer of the Contracts. All applications are subject to acceptance or rejection by the INSURER in its sole discretion. 3. AUTHORITY AND DUTIES OF AGENCY. ------------------------------ a. RESPONSIBILITIES OF THE AGENCY. ------------------------------ (i) The AGENCY agrees to procure applications for the INSURER'S Contracts. Production must be through a duly authorized Marketing Support Broker-Dealer, as set forth in Exhibit A, and the SELLING BROKER-DEALER and subagents appointed by the AGENCY, who are duly appointed by the INSURER. Insurer agrees to appoint such licensed agents determined to meet Insurer's profile upon request of Agency. (ii) The AGENCY warrants that it and all of its subagents appointed pursuant to this Agreement shall not solicit nor aid, directly or indirectly, in the solicitation of any application for any Contract until they are fully licensed by the proper authorities under the applicable insurance laws within the applicable jurisdictions where the AGENCY and subagents propose to offer the Contracts, where the INSURER is authorized to conduct business and where the Contracts may be lawfully sold. 4 (iii) The AGENCY shall periodically provide the INSURER with a list of all subagents appointed by the AGENCY and the jurisdictions where such subagents are licensed to solicit sales of the Contracts. The AGENCY shall provide to the INSURER immediate notice of subagents terminating their relationship with the AGENCY. Upon such notice, the subagent's appointment with the INSURER will be terminated and the subagent will no longer be authorized to represent the INSURER. The INSURER may thereafter recontract with such subagent at the INSURER'S discretion. The INSURER will make best efforts not to recontract subagent before 60 days have passed. (iv) The AGENCY shall prepare and transmit the appropriate appointment forms to the INSURER. The INSURER may refuse for any reason to apply for the appointment of a subagent and may cancel any existing appointment at any time. Subagents will be the subject of a background check, conducted by, and at the expense of, the INSURER. The AGENCY shall pay all fees to state insurance regulatory authorities, all initial appointment and renewal fees in connection with obtaining necessary licenses and authorizations for Agency and subagents to solicit and sell the Contracts. (v) The AGENCY shall supervise all subagents appointed pursuant to this Agreement to solicit sales of the Contracts and bear responsibility for all acts and omissions of each subagent. The AGENCY shall comply with and exercise all responsibilities required by applicable federal and state law and regulations. The AGENCY shall train and supervise its subagents to ensure that purchase of a Contract is not recommended to an applicant in the absence of reasonable grounds to believe the purchase of the Contract is suitable for that applicant. While not limited to the following, a determination of suitability shall be based on information furnished to a subagent after reasonable inquiry of such applicant concerning the applicant's insurance and investment objectives, financial situation and needs, and the likelihood that the applicant will continue to make any premium payments contemplated by the Contracts and will keep the Contract in force. (vi) The AGENCY and SELLING BROKER-DEALER hereby warrant and represent that before a subagent is permitted to sell the Contracts, the AGENCY, SELLING BROKER-DEALER and subagent shall upon request of Insurer, confirm in writing that: (i) subagent is appointed a subagent of the AGENCY and a Representative of SELLING BROKER-DEALER, (ii) subagent agrees that his or her selling activities relating to the Contracts shall be under the supervision and control of SELLING BROKER-DEALER; and (iii) that subagent's right to continue to sell such Contracts is subject to his or her continued compliance with such agreement and any procedures, rules or regulations implemented by SELLING BROKER-DEALER and the AGENCY. 5 (vii) The AGENCY agrees to treat money received or collected for the INSURER as property held on behalf of the Insurer, and to remit such money promptly in full, together with the application form and any other required documentation, to the INSURER'S Customer Service Center at the address shown on the application form for the Contract. All such payment and documents shall be the property of the INSURER as described in Section 4. (viii) The AGENCY agrees to adhere to the "cash with application" requirements as set forth in the Insurer's rules and regulations, a copy of which the AGENCY acknowledges it has received and Insurer acknowledges it has delivered to Agency. The AGENCY further agrees, when applicable, to provide the proper form of interim coverage and inform the applicant of the specific conditions of the coverage. (ix) The AGENCY agrees to comply with the underwriting and issue requirements of the INSURER and the applicable insurance laws and regulations of the state or states in which the AGENCY operates. Such laws and regulations include, but are not limited to, those pertaining to client funds, privacy and confidentiality, licensing, rebating, replacements, solicitation and advertising. (x) The AGENCY agrees to inform the INSURER of all material facts of which the AGENCY is aware relating to insurance of insureds or proposed insureds. (xi) The AGENCY agrees to train and exercise general supervision over subagents. b. REJECTION OF SUBAGENT. --------------------- The INSURER may refuse for any reason, by written notice to the AGENCY, to permit any subagent the right to solicit applications for the sale of any of the Contracts. Upon receipt of such notice, AGENCY immediately shall cause such subagent to cease such solicitations of sales and cancel the appointment of any subagent under this Agreement. In the event a subagent is no longer appointed by AGENCY, such subagent's right to solicit applications for the sale of any of the Contracts shall immediately cease. c. LIMITATION OF AUTHORITY. ----------------------- (i) The AGENCY shall have no authority and agrees not to bind the INSURER by any promise or agreement; incur any debt, expense, or liability whatever in its name or account; or receive any money due or to become due to the INSURER except first premiums on applications or Contracts and except where the INSURER otherwise agrees in writing. 6 (ii) The AGENCY shall have no authority and agrees not to deliver any policy or allow any policy to be delivered until the first premium has been paid in full. No delivery shall take place if, after an inquiry, the AGENCY or subagent is aware that any person proposed for insurance is not in the same condition of health, habits, occupation and other facts as are represented in the application. (iii) The AGENCY shall have no authority and agrees not to make, modify or discharge any Contract, or bind the INSURER by making any promises respecting any Contract, except when authorized in writing to do so by an authorized officer of the INSURER. (iv) The AGENCY shall have no authority and agrees not to authorize or allow a subagent to do any act prohibited under this contract. d. GENERAL PROVISIONS. ------------------ (i) The AGENCY may not assign the rights to procure applications or be relieved of the obligations of the AGENCY under this Agreement without the INSURER'S prior written consent. (ii) The AGENCY shall be solely responsible for hiring any staff the AGENCY may desire and for maintaining office space and meeting necessary expenses without reimbursement from the INSURER. (iii) The AGENCY and its subagents shall be free to exercise independent judgment as to the time, place and means of performing all acts under this Agreement, and the relationship of the AGENCY and its subagents to the INSURER shall be that of an independent contractor. Nothing in this Agreement shall be construed to create the relationship of employer and employee between the AGENCY (or any of its subagents) and the INSURER. (iv) The INSURER and the AGENCY recognize and respect each other's interest in providing continuing service to those who purchase Contracts. Each party agrees to provide the others relevant information regarding the Contracts on a reasonable basis, as done in the normal course of business. (v) Failure of the AGENCY or the INSURER to insist upon strict compliance with any of the conditions of this agreement shall not be construed as a waiver of any such conditions. (vi) No oral promises or representations shall be binding nor shall this Agreement be modified except by agreement in writing, executed on behalf of the INSURER and ING AMERICA EQUITIES by a duly authorized officer of each of them. 7 (vii) This Agreement supersedes all previous contracts and agreements between the AGENCY and the INSURER made for the procurement of variable products; but it shall not affect any contract or agreement between the AGENCY and the INSURER made for the procurement of non-variable insurance products, or the economic obligations of either party on existing policies which exist under any such previous or continuing contracts or agreements. (viii) The provisions under this Section shall survive any termination of this Agreement. (ix) The AGENCY hereby grants a limited Power of Attorney to the SELLING BROKER-DEALER, to execute any amendments, modifications or waivers with respect to this Agreement. 4. PROPERTY OF INSURER. All money payable in connection with any of the ------------------- Contracts, whether as premium, purchase payment or otherwise and whether paid by or on behalf of any contract owner or anyone else having an interest in the Contracts, is the property of the INSURER and shall be transmitted immediately in accordance with the administrative procedures of the INSURER without any deduction or offset for any reason including, but not limited to, any deduction or offset for compensation claimed by SELLING BROKER-DEALER or the AGENCY. 5. COMPENSATION. While this Agreement is in force and on all business sold ------------ prior to termination for which Selling Broker-Dealer remains agent of record, ING AMERICA EQUITIES shall arrange for payment to SELLING BROKER-DEALER of compensation payable on sales of the Contracts solicited in accordance with the compensation schedules attached hereto, as in effect at the time the Contract premiums or purchase payments (both referred to as "Premiums") are received by the INSURER. Compensation to the AGENCY and the Representative or subagent for Contracts solicited and sold by the Representative or subagent shall be governed by an agreement between SELLING BROKER-DEALER and its Representative or subagent, and to the extent deemed necessary by the SELLING BROKER-DEALER, by an agreement between the SELLING BROKER-DEALER and the AGENCY. In the event a Contract is transferred to a new broker-dealer at the request of Contract owner, all compensation earned and payable under such Contract shall cease In the event it is determined by any party for any reason (other than a termination of this Agreement by INSURER or ING AMERICA EQUITIES for "cause") that SELLING BROKER-DEALER will no longer sell new Contracts, the Agreement will remain in effect solely to allow SELLING BROKER-DEALER to receive compensation on premiums received in connection with Contracts which were either in effect or for which application had been received prior to such termination of new sales activities. SELLING BROKER-DEALER shall maintain all SEC, NASD and applicable state securities and insurance registrations and licenses, to the extent required in order to continue to receive such commissions, and all parties hereto shall continue to comply with all applicable terms and conditions of the Agreement after such termination. If SELLING BROKER-DEALER does not 8 maintain such required registrations and licenses, is dissolved or liquidated, does not comply with the applicable terms and conditions of the Agreement or if the Agreement is otherwise terminated for cause, no further compensation will be due to SELLING BROKER-DEALER. However, SELLING BROKER-DEALER shall be entitled to receive compensation for all new and additional premium payments which are in process at the time of termination, and shall continue to be liable for any charge-backs pursuant to the provisions of any Schedule hereto and for any other amount advanced by or otherwise due the INSURER or ING AMERICA EQUITIES. SELLING BROKER-DEALER represents that no commissions or other compensation based upon a percentage of premiums or based upon a percentage of assets or other valuable consideration will be paid for services rendered in soliciting the purchase of the Contracts by any person or entity which is not duly licensed and registered by the required authority and appointed by the Insurer to sell the Contracts in the state of such solicitation or sale; provided, however, that this representation shall not prohibit the payment of compensation to the surviving spouse or other beneficiary of a person entitled to receive such compensation pursuant to a bona fide written contract that calls for such payment. SELLING BROKER-DEALER agrees that no compensation of any kind other than described in this Section 5 of this Agreement is payable by the INSURER or ING AMERICA EQUITIES to SELLING BROKER-DEALER unless otherwise agreed in writing. The amount of compensation, if any, and its time of payment for replacements, changes, conversions, exchanges, term renewals, term conversions, premiums paid in advance, policies issued on a "guaranteed issue" basis, or other special cases and programs, shall be governed by the INSURER'S underwriting and administrative rules then in effect. 6. TRAIL COMMISSIONS. For any Contracts for which a trail commission is paid, ------------------ such commission shall be credited on an annualized basis. Such commissions shall be computed monthly as of the end of each policy month on the Contract's Accumulated Value less policy debt. The trail commission shall be payable as specified in the applicable Compensation Schedule, on each Contract anniversary at the end of the Contract year. Trail commission shall be paid only if the Contract is in force on the date the trail commission becomes payable. 7. REFUND OF COMPENSATION. No compensation shall be payable, and SELLING ---------------------- BROKER-DEALER and AGENCY jointly and severally agree to reimburse ING AMERICA EQUITIES promptly, and in any event within 30 days, for any compensation paid to SELLING BROKER-DEALER or its Representatives under each of the following conditions: a) if the INSURER, in its sole discretion, determines not to issue the Contract applied for; b) if the INSURER refunds the premiums or purchase payments upon the applicant's surrender or withdrawal pursuant to any "free- look" privilege; c) if the INSURER refunds the premiums or purchase payments paid by applicant as a result of a complaint by applicant, recognizing that the Insurer has sole reasonable discretion to refund premiums or purchase payments after SELLING BROKER-DEALER has the opportunity to review and respond to the complaint in a timely manner; d) if the INSURER determines that any 9 person signing an application who is required to be licensed or any other person or entity receiving compensation for soliciting purchase of the Contracts is not duly licensed to sell the Contracts in the jurisdiction of such sale or attempted sale; e) if a Contract is surrendered, lapsed or exchanged within six months of the date it was issued by the INSURER; and f) as may be otherwise provided in the Compensation Schedule. 8. INDEBTEDNESS AND RIGHT OF SETOFF. Nothing contained herein shall be -------------------------------- construed as giving SELLING BROKER-DEALER or Representative the right to incur any indebtedness on behalf of the INSURER or ING AMERICA EQUITIES. SELLING BROKER-DEALER hereby authorizes the INSURER and ING AMERICA EQUITIES to set off liabilities, however created, of SELLING BROKER-DEALER and Representative to the INSURER and ING AMERICA EQUITIES against any and all amounts otherwise payable to SELLING BROKER-DEALER. Adjustments for administrative transactions (i.e. bounced check, free look, etc.) will be made routinely, as needed. INSURER and ING AMERICA EQUITIES agree to consult with SELLING BROKER-DEALER prior to offsetting compensation for reasons other than normal administrative practice. 9. TERMINATION. This Agreement may not be assigned except by written mutual ----------- consent and shall continue for an indefinite term, subject to the termination by any party upon ten-days' advance written notice to the other parties, except that in the event ING AMERICA EQUITIES or SELLING BROKER-DEALER ceases to be a registered broker-dealer or a member of the NASD, this Agreement shall immediately terminate. In addition, this Agreement may be terminated immediately by the INSURER or ING AMERICA EQUITIES for cause. For purposes of this section 9, "cause" shall mean failure to return money to clients, where appropriate, failure to account for any money received from or on behalf of the INSURER, any fraud, misrepresentation or dishonesty in any relationship with the INSURER or ING AMERICA EQUITIES, or any past, present or proposed client, violation of any federal or state law or regulation, or violation of any of the terms of this Agreement. Upon its termination, all authorizations, rights and obligations shall cease, except the agreements in Sections 3, 7, 8, 12 and 13 and the payment of any accrued but unpaid compensation to SELLING BROKER-DEALER or refund of compensation due to ING AMERICA EQUITIES and the INSURER. 10. NON-EMPLOYEE RELATIONSHIP. For the purpose of compliance with any ------------------------- applicable federal or state securities laws or regulations, SELLING BROKER- DEALER acknowledges and agrees that in performing the services covered by this Agreement, it is acting in the capacity of an independent "broker" or "dealer" as defined in the By-Laws of the NASD and not as an agent or employee of the INSURER or ING AMERICA EQUITIES or any registered investment company. In furtherance of its responsibilities as a broker or dealer, SELLING BROKER-DEALER acknowledges that it is responsible for statutory and regulatory compliance in securities transactions involving any business produced by its Representatives concerning the Contracts. 11. NON-EXCLUSIVITY. SELLING BROKER-DEALER agrees that no territory or product --------------- is assigned exclusively hereunder and that the INSURER and ING AMERICA EQUITIES reserve the 10 right in their discretion to enter into Selling Agreements with other broker- dealers, and to contract with or establish one or more insurance agencies in any jurisdiction in which SELLING BROKER-DEALER transacts business hereunder. 12. CO-OPERATION IN INVESTIGATION. SELLING BROKER-DEALER, AGENCY, ING AMERICA ----------------------------- EQUITIES, and the INSURER jointly agree to cooperate fully in any insurance, securities or other regulatory investigation or proceeding or judicial proceeding arising in connection with any Contract. Without limiting the foregoing: a. SELLING BROKER-DEALER shall promptly notify the INSURER and ING AMERICA EQUITIES of any customer complaint or notice of any regulatory authority investigation or proceeding or judicial proceeding which it might receive with respect to any Contract. b. In the case of a substantive customer complaint, the parties shall cooperate in investigating and responding to such complaint. Any response shall be sent to the other parties to this Agreement on a best efforts basis for approval not less than five business days prior to its being sent to the customer or regulatory authority, except that if a more prompt response is required, the proposed response shall be communicated by telephone and facsimile transmission. 13. INDEMNIFICATION. --------------- a. The INSURER and ING AMERICA EQUITIES (referred to jointly in this Section 13 as "SLD") agree to indemnify and hold harmless SELLING BROKER-DEALER and AGENCIES (referred to jointly in this Section 13 as the "SELLING GROUP") and such associated persons as its officers, directors, agents and employees, against any losses, claims, damages or liabilities, joint or several, to which SELLING GROUP or such associated persons may become subject under the 1933 Act, the 1934 Act or other federal or state statutory law or regulation, at common law or otherwise, insofar as such losses, claims, damages, or liabilities (or actions in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of a material fact required to be stated therein or necessary to make the statements therein not misleading contained (i) in any Registration Statement, any prospectus or any document executed by SLD specifically for the purpose of qualifying a Contract for sale under the laws of any jurisdiction or (ii) in any written information or sales material authorized for and supplied or furnished to SELLING GROUP and its agents or representatives by SLD, their employees or agents, in connection with the sale of the Contract. SLD shall reimburse SELLING GROUP and each such associated person for legal or other expenses reasonably incurred by SELLING GROUP or such associated person in connection with investigating or defending any such loss, claim, damage, liability or action. b. The SELLING GROUP jointly and severally agree to indemnify and hold harmless SLD, and their affiliates and such associated persons as their officers, directors, agents and employees, against any losses, claims, damages or liabilities to which SLD and any such 11 associated person may become subject under the 1933 Act, the 1934 Act or other federal or state statutory law or regulation, at common law or otherwise, insofar as such losses, claims, damages, or liabilities (or actions in respect thereof) arise out of or are based upon: (i) any unauthorized use of sales materials or any oral or written misrepresentations or any unlawful sales practices concerning a Contract by the SELLING GROUP, its officers, directors, employees, agents, Representatives or associated persons; and (ii) claims by agents or Representatives or employees of the SELLING GROUP for commissions or other compensation or remuneration of any type; and (iii) failure by agents, Representatives or employees of the SELLING GROUP to comply with all applicable state insurance laws and regulations including but not limited to state licensing requirements, rebate statutes and replacement regulations, and the provisions of this Agreement; and (iv) telephone instructions by a Representative to SLD in connection with any Contracts. The SELLING GROUP shall reimburse SLD and any director, officer, employee or agent for any legal or other expenses reasonably incurred by SLD or such associated person in connection with investigating or defending any such loss, claim, damage, liability or action. This indemnity provision shall be in addition to any liability which the SELLING GROUP may otherwise have. c. After a party entitled to indemnification receives notice of the commencement of any action, if a claim in respect thereof is to be made against any person obligated to provide indemnification, such indemnified party shall notify the indemnifying party in writing of the commencement thereof as soon as practicable thereafter. However, the omission to so notify the indemnifying party shall not relieve it from any liability except to the extent that the omission results in a failure of actual notice to the indemnifying party, and such indemnifying party is damaged solely as a result of the failure to give such notice. 14. FIDELITY BOND AND ERRORS AND OMISSIONS INSURANCE. SELLING BROKER-DEALER ------------------------------------------------ shall secure and maintain, to the extent required by regulatory bodies from time to time, any fidelity bond, errors and omissions insurance, surety bond and other blanket bond requirements and will notify ING AMERICA EQUITIES immediately in the event a determination is made to cancel, terminate or substantially modify such coverages. 15. NOTICES. All notices to the INSURER or ING AMERICA EQUITIES should be ------- mailed to: ING AMERICA EQUITIES, INC. Attn: Chief Compliance Officer 12 1290 Broadway Denver, CO 80203-5699 All notices to SELLING BROKER-DEALER and AGENCIES shall be duly given if mailed to: PAINEWEBBER INCORPORATED Attn: Product Director-Insurance 1200 Harbor Blvd - 4th Floor Weehawken, NJ 07087 with a copy to: PaineWebber, Inc. Legal Dept - Product Group 1200 Harbor Blvd - 10th Floor Weehawken, NJ 07087 16. GOVERNING LAW AND VENUE. This Agreement shall be governed by and construed ----------------------- in accordance with the laws of the State of Colorado. The parties agree that any and all disputes that arise from this agreement are subject exclusively to arbitration under the rules of arbitration of the National Association of Securities Dealers Registration, Inc., whose decision shall be final and binding on the parties.. 17. AMENDMENT OF AGREEMENT. The INSURER or ING AMERICA EQUITIES may amend this ---------------------- Agreement, including any Schedules and Exhibits hereto, upon at least ten (10) days' prior written notice to SELLING BROKER-DEALER. The submission of an application for the Contracts by SELLING BROKER-DEALER after the effective date of any such amendment shall constitute agreement to such amendment. Additional AGENCIES may be added as parties to this Agreement at any time by a written amendment signed by the INSURER, ING AMERICA EQUITIES, SELLING BROKER-DEALER and such additional AGENCIES. All AGENCIES which are parties to this Agreement at the time of such amendment hereby consent and agree in advance to the addition of such additional AGENCIES. 18. BINDING EFFECT. This Agreement shall be binding on and shall inure to the -------------- benefit of the parties to it and their respective successors in interest. If any provision of the Agreement conflicts with any other provision, or if any provision shall be held or made invalid by a court decision, statute, rule or otherwise, the remainder of this Agreement shall not be affected thereby. 19. EFFECTIVE DATE AND MERGER. This Agreement shall be effective as of the ------------------------- date it is fully executed by all parties. This Agreement, including all Exhibits and Schedules hereto, constitutes the entire Agreement between the parties and supersedes in its entirety any and all previous agreements among the parties with respect to the Contracts. 13 20. EXECUTION IN COUNTERPARTS. This Agreement may be executed simultaneously -------------------------- in two or more counterparts, each of which taken together will constitute one and the same instrument. 21. ADDENDUM TO CONTRACT. This Addendum to Contract is incorporated into and made a part of this Agreement. 14 In reliance on the representations set forth and in consideration of the undertakings described, the parties represented below do hereby contract and agree. SECURITY LIFE OF DENVER ING AMERICA EQUITIES, INC. INSURANCE COMPANY By: /s/ Pamela Erbes By: /s/ Martha K. Evans ---------------- ------------------- Date: April 9, 1997 Date: April 17, 1997 ------------- -------------- (or) FIRST ING LIFE INSURANCE COMPANY OF NEW YORK By: /s/ Stephen J. Yarina --------------------- Date: April 18, 1997 -------------- PAINEWEBBER INCORPORATED PWJC Insurance Sales Incorporated ---------------------------- SELLING BROKER-DEALER AGENCY By: /s/ Robert J. Bethoney By: /s/ Robert J. Bethoney ----------------------- ----------------------- Title: Sr. Vice President Title: Sr. Vice President --------------------- ------------------- Date: April 7, 1997 Date: April 7, 1997 ------------- ------------- PWJC Sales Agency Incorporated PaineWebber Insurance Sales (Arizona) - ---------------------------- ---------------------------- AGENCY AGENCY Incorporated By: /s/ Robert J. Bethoney By: /s/ Robert J. Bethoney ----------------------- ------------------------ Title: Senior Vice President Title: Senior Vice President ------------------------ ------------------------ Date: April 7, 1977 Date: April 7, 1997 ------------- ------------- 15 EXHIBIT A --------- LIST OF MARKETING SUPPORT BROKER-DEALERS ---------------------------------------- The following broker-dealers (the "Marketing Support Broker-Dealers") have entered into a wholesaling or similar marketing support agreement with INSURERS and ING AMERICA EQUITIES and have agreed to provide certain marketing, sales or administrative support services to the registered representatives of the SELLING BROKER-DEALER. The compensation percentages noted below indicate the respective percentages of the total compensation available for the sale of a particular Contract, as set forth in the applicable compensation schedule, that will be paid to Marketing Support Broker-Dealer and SELLING BROKER-DEALER. Marketing Support Broker-Dealer Compensation Split - ------------------------------- ------------------ To Marketing Support To Selling Broker-Dealer Broker-Dealer ------------- ------------- The Leaders Group, Incorporated 30% 70% 16 EXHIBIT B --------- COMPENSATION SCHEDULE FOR ------------------------- FIRSTLINE VARIABLE UNIVERSAL LIFE INSURANCE ------------------------------------------- POLICY FORM 1191 AND FORM 1197 -------------------------------- (WHOLESALING VERSION) --------------------- The provisions of this Schedule apply to SECURITY LIFE FirstLine Variable Universal Life Insurance Policy Forms 1191 and 1197, solicited and issued while this Schedule is in effect. The compensation described in this Schedule represents the maximum compensation available to the SELLING BROKER-DEALER and the applicable Marketing Support Broker-Dealer, on a combined basis, when policies are issued and premium is accepted by SECURITY LIFE. The respective percentages of this maximum compensation that will be payable to the applicable Marketing Support Broker-Dealer and SELLING BROKER-DEALER are set forth in Exhibit A. All compensation payable under this Schedule shall be subject to the terms and conditions contained herein when premium payments are accepted by SECURITY LIFE. Commissions On Premium Payments ---------------- A B C - - - Fully Underwritten (Non-Guaranteed Issue) 95% 4% 2% Notes 1. Commission Structure: --------------------- First Target Premium A's percentage (95%) of all premium allocated to the first target, regardless of policy year. Renewals B's percentage (4%) of all premium above the first target in policy years 1-10 Ultimate C's percentage (2%) of all premium received after the 10th policy anniversary 2. Target Premium: The target premium is an amount determined from tables -------------- published by SECURITY LIFE with respect to a policy or rider upon which commissions are based. As it applies to future business, the target premium may be changed from time to time by SECURITY LIFE. The target premium applicable to a particular coverage shall be determined from the 17 table in force when the first premium for such coverage is entered as paid in the accounting records of SECURITY LIFE. 3. Trail Commissions: A trail commission of 0.10% on an annualized basis is ----------------- calculated at the end of each month based on the policy's Account Value less policy debt at the end of the prior month. The trail commission begins at the earlier of: a. the tenth policy anniversary, or b. the end of the policy year in which the cumulative premium payments less partial withdrawals equals or exceeds the guideline single premium as defined by the Internal Revenue Code. The trail commission is payable annually at the end of a policy year provided the policy is in force (and not subject to the Grace Period provision) on such date. If trail commissions begin prior to the tenth policy anniversary pursuant to b) above, the trail commission in the first year will be calculated for the entire year. 4. Riders: Waiver of Cost of Insurance Rider, Additional Insured Rider, ------ Children's Insurance Rider, Guaranteed Insurability Rider, Accidental Death Benefit Rider and Waiver of Specified Premium Rider are commissionable and will have a separate target premium which is set at issue and is level thereafter. The Adjustable Term Insurance Rider has no target premium associated with it. Flat extra ratings with a duration of six years or more are commissionable and substandard table ratings are commissionable based upon the first year additional cost of insurance charge. The only rider available for Guaranteed Issue is the Adjustable Term Rider. 5. Commission Calculation: Commissions shall be calculated only on premium ---------------------- actually received and accepted by SECURITY LIFE. Commissions shall be paid only on an earned basis. 6. Premium Allocation: If the Stated Death Benefit has been increased since ------------------ the policy date, premiums received are allocated to the coverage segments in the same proportion that the guideline annual premium for each segment bears to the total guideline annual premium of the policy. 7. Guaranteed Issue: First year commission rates will be reduced for ---------------- Guaranteed Issue for all issue ages. SECURITY LIFE offers two Guaranteed Issue programs known as Regular and Select. The commission levels for each of these programs for first target as described under Commission Structure are shown in the tables below. The commission levels for renewals, ultimate and trail, are the same as the fully underwritten version. 18
Guaranteed Issue: First Year Commission Rate -------------------------- Issue Age Non-Smokers Smokers Regular Guaranteed Issue: 0-40 77% 48% 41-45 77% 43% 46-50 61% 27% 51-55 35% 11% 56-60 17% 4% 61-65 8% 4% 66+ 4% 4% Select Guaranteed Issue: 0-40 82% 65% 41-45 82% 57% 46-50 70% 38% 51-55 52% 15% 56-60 34% 4% 61-65 14% 4% 66+ 4% 4%
Guaranteed Issue is available for ages 71 and above by exception only. 8. Compensation Payments: Compensation on initial premium shall be due to the --------------------- SELLING BROKER-DEALER at the time of the issuance of the policy and for all other premium payments at the time of the receipt and acceptance of premium by SECURITY LIFE, except that the amount, if any, and the time of payment of compensation on replacements, reissues, changes, conversions, exchanges, term renewals, term conversions, premiums paid in advance, policies issued on a "guaranteed issue" basis, policies requiring facultative reinsurance arrangements, and other special cases and programs shall be governed by SECURITY LIFE'S underwriting and administrative rules then in effect. The Compensation shall be payable to the SELLING BROKER-DEALER in accordance with the Schedule in effect at the time of issue of the policy. 9. Commission Chargeback: In the event that a policy for which a commission --------------------- has been paid is lapsed or surrendered by the Policy Owner during the first six months, or is returned to SECURITY LIFE for refund of premium during the Free Look Period as described in the policy, SECURITY LIFE and ING AMERICA EQUITIES shall require reimbursement from the SELLING BROKER-DEALER equal to 100% of the commission paid. If a premium payment for which a commission has been paid is refunded by SECURITY LIFE, a reimbursement of the commission paid on the amount refunded will be due from the SELLING BROKER-DEALER. 19 The reimbursement may be deducted by ING AMERICA EQUITIES from the next, or any subsequent, commission payment to the SELLING BROKER-DEALER. If the amount to be reimbursed exceeds compensation otherwise due, the SELLING BROKER-DEALER shall promptly reimburse ING AMERICA EQUITIES before the next commission cycle. 10. Internal Exchanges: Commissions on the exchange of any SECURITY LIFE ------------------ policy for FirstLine will be paid in accordance with the exchange policies in effect at SECURITY LIFE on the date the exchange is completed. The commission rates and/or target premiums may be adjusted in accordance with the rules in effect at the time of the exchange. If the Representative responsible for the exchange is not the producer of the original policy, and the original producer is still appointed with SECURITY LIFE, no commission will be payable to the Representative or the SELLING BROKER-DEALER. 11. Termination and Amendment: SECURITY LIFE and ING AMERICA EQUITIES reserve ------------------------- the right to terminate or amend this Schedule by providing written notification to the SELLING BROKER-DEALER in accordance with Sections 9, 15 and 17 of this Agreement. With the exception of the terms changed by any such Amendment, all other terms and conditions of the original Schedule shall remain in full force and effect. 20 EXHIBIT C --------- COMPENSATION SCHEDULE FOR ------------------------- STRATEGIC ADVANTAGE VARIABLE UNIVERSAL LIFE INSURANCE ----------------------------------------------------- POLICY FORM 1195 ---------------- (WHOLESALING VERSION) --------------------- The provisions of this Schedule apply to SECURITY LIFE Strategic Advantage Variable Universal Life Insurance Policy Form 1195, solicited and issued while this Schedule is in effect. The compensation described in this Schedule represents the maximum compensation available to the SELLING BROKER-DEALER and the applicable Marketing Support Broker-Dealer, on a combined basis, when policies are issued and premium is accepted by SECURITY LIFE. The respective percentages of this maximum compensation that will be payable to the applicable Marketing Support Broker-Dealer and SELLING BROKER-DEALER are set forth in Exhibit A. All compensation payable under this Schedule shall be subject to the terms and conditions contained herein when premium payments are accepted by SECURITY LIFE. 1. Fully Underwritten (Non-Guaranteed Issue) and Guaranteed Issue: --------------------------------------------------------------
Commissions Up to Annual Target Above Annual Target All Premiums - ------------------- ------------------- ------------ Policy Policy Policy Policy Year Years Years Years 1 2-5 1-5 6+ ------ ------ ------ ------ 15% 10% 3% 3%
2. Target Premium: The target premium is an annual amount determined from -------------- tables published by SECURITY LIFE with respect to a policy or rider upon which commissions are based. As it applies to future business, the target premium may be changed from time to time by SECURITY LIFE. The target premium applicable to a particular coverage shall be determined from the table in force when the first premium for such coverage is entered as paid in the accounting records of SECURITY LIFE. 3. Trail Commissions: A trail commission of 0.15% on an annualized basis is ----------------- calculated at the end of each month based on the policy's Account Value less policy debt at the end of the prior month. The trail commission begins on the sixth policy anniversary. The trail commission is payable annually at the end of a policy year provided the policy is in force (and not subject to the Grace Period provision) on such date. 21 4. Riders: Waiver of Cost of Insurance Rider, Additional Insured Rider, ------ Guaranteed Insurability Rider, Accidental Death Benefit Rider and Waiver of Specified Premium Rider are commissionable and will have a separate target premium which is set at issue and is level thereafter. The Adjustable Term Insurance Rider has no target premium associated with it. Flat extra ratings with a duration of six years or more are commissionable and substandard table ratings are commissionable based upon the first year additional cost of insurance charge. 5. Commission Calculation: Commissions shall be calculated only on premium ---------------------- actually received and accepted by SECURITY LIFE. Commissions shall be paid only on an earned basis. 6. Premium Allocation: If the Stated Death Benefit has been increased since ------------------ the policy date, premiums received are allocated to the coverage segments in the same proportion that the guideline annual premium for each segment bears to the total guideline annual premium of the policy. 7. Guaranteed Issue: Commission rates for Guaranteed Issue are the same as for ---------------- fully underwritten cases. Security Life offers two Guaranteed Issue programs known as Regular and Select. Guaranteed Issue is available for ages 71 and above by exception only. 8. Compensation Payments: Compensation on initial premium shall be due to the --------------------- SELLING BROKER-DEALER at the time of the issuance of the policy and for all other premium payments at the time of the receipt and acceptance of premium by SECURITY LIFE, except that the amount, if any, and the time of payment of compensation on replacements, reissues, changes, conversions, exchanges, term renewals, term conversions, premiums paid in advance, policies issued on a "guaranteed issue" basis, policies requiring facultative reinsurance arrangements, and other special cases and programs shall be governed by SECURITY LIFE'S underwriting and administrative rules then in effect. The Compensation shall be payable to the SELLING BROKER-DEALER in accordance with the Schedule in effect at the time of issue of the policy. 9. Commission Chargeback: In the event that a policy for which a commission --------------------- has been paid or is returned to SECURITY LIFE for refund of premium during the Free Look Period as described in the policy, SECURITY LIFE and ING AMERICA EQUITIES shall require reimbursement from the SELLING BROKER-DEALER equal to 100% of the commission paid. In the event that a policy for which a commission has been paid is lapsed, surrendered or has a requested decrease to the Stated Death Benefit within the first three policy years, SECURITY LIFE and ING AMERICA EQUITIES shall require reimbursement from the SELLING BROKER-DEALER. The chargebacks are based on the lesser of the target premium or the actual premium paid in that policy year. 22 Commission Chargeback Table Policy Percent of Annual Year Target Premium Paid ----- ------------------- 1 8% 2 4% 3 2% 4 0% If a premium payment for which a commission has been paid is refunded by SECURITY LIFE, a reimbursement of the commission paid on the amount refunded will be due from the SELLING BROKER-DEALER. The reimbursement may be deducted by ING AMERICA EQUITIES from the next, or any subsequent, commission payment to the SELLING BROKER-DEALER. If the amount to be reimbursed exceeds compensation otherwise due, the SELLING BROKER-DEALER shall promptly reimburse ING AMERICA EQUITIES before the next commission cycle. 10. Internal Exchanges: Commissions on the exchange of any SECURITY LIFE ------------------ policy for Strategic Advantage will be paid in accordance with the exchange policies in effect at SECURITY LIFE on the date the exchange is completed. The commission rates and/or target premiums may be adjusted in accordance with the rules in effect at the time of the exchange. If the Representative responsible for the exchange is not the producer of the original policy, and the original producer is still appointed with SECURITY LIFE, no commission will be payable to the Representative or the SELLING BROKER-DEALER. 11. Termination and Amendment: SECURITY LIFE and ING AMERICA EQUITIES reserve ------------------------- the right to terminate or amend this Schedule by providing written notification to the SELLING BROKER-DEALER, in accordance with Sections 9, 15 and 17 of this Agreement. With the exception of the terms changed by any such Amendment, all other terms and conditions of the original Schedule shall remain in full force and effect. 23 ADDENDUM TO CONTRACT Security Life of Denver BETWEEN Insurance Company ("COMPANY") and PAINEWEBBER INCORPORATED and/or those ----------------- companies listed on Exhibit A, as applicable (collectively referred to in this Addendum as "PaineWebber"). DATED _________________________. 1. In the event of termination between Company and PaineWebber, with or without cause, Company agrees to continue to provide PaineWebber with policy information for each and every policy placed with Company in the same manner that it had during the time the Agreement was in force. This includes but shall not be limited to: current policy value, surrender information, copies of policies, premium deposit information, loans and/or surrenders. This provision is intended to allow PaineWebber, notwithstanding the fact that the Agreement between the Company and PaineWebber may have been terminated, to satisfactory service its clients broader financial needs and continuing relationship. 2. PaineWebber and its affiliates are formalizing their policy relating to all offering documents, sales literature, and marketing materials/1/ of outside products distributed through the PaineWebber sales organization, including all such materials distributed or made available the Company. All such materials shall be up-to-date as of the time they distributed or made available by the Company to PaineWebber personnel. In additional for all such materials that the Company distributes or makes available to PaineWebber personnel, its employees, agents and representatives, you represent, warranty and covenant now and for such materials in the future that: A. Public Materials: All materials intended for public distribution which are distributed or made available by the Company to PaineWebber personnel have, where applicable, been submitted are to and cleared or approved by the United States Securities and Exchange Commission, the National Association of Securities Dealers, Inc., or any state insurance or securities regulatory agencies as appropriate, and comply with all applicable laws, rules and regulations. B. "Internal Use Only" Materials: All materials distributed or made available to PaineWebber personnel which are intended for "internal" or "broker use only" have been reviewed by the appropriate personnel of the Company and have been determined to be accurate and in compliance with all applicable laws, rules and regulations. Such materials are, and will continue to be, clearly designated "Internal Use Only", or contain similar clearly designated language to the effect that these materials are not to be shown or distributed to the public. C. Continuing Compliance: You acknowledge that the distribution to PaineWebber personnel of the above-referenced material that are not in compliance with the above statements is strictly prohibited, and you acknowledge that Paine Webber is relying on the Company fulfilling its ___________________________________ /1/ Sales literature, marketing materials and "Internal Use Only" documents include, but are not limited to: Broker-dealer kits; brochures; newsletters; advertisements; documents regarding sales promotions or contests; questions and answer sheets; scripts; speech outlines or other public presentations; prospecting or solicitation letters; slide presentations; audiotapes and videotapes; columns prepared for outside publications; repairs or excerpts from published materials: and any documents or items adapted from the above materials. obligations and agreements hereunder. Further, the Company will take all reasonable actions to prevent the distribution to PaineWebber personnel of any such materials that are inconsistent with these representations. The Company hereby agrees to indemnify and hold harmless PaineWebber, its subsidiaries and affiliates and their respective officers, directors and employees against any and all losses, claims, damages, liabilities or expenses (including the reasonable costs of counsel and investigation) to which PaineWebber may become subject, insofar as any such loss, claim, damage, liability or expense (or action with respect thereto) arises out of or is based on any untrue statement of a material fact contained in any registration statement or any offering document, sales literature, or marketing material that the Company provided to PaineWebber, arises out of or is based on the omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, or arises out of or is based on a breach or violation of the representations, warranties or covenants contained herein. These provisions shall survive termination of any agreement between the Company and PaineWebber and will be in addition to any liability which the Company may otherwise have to PaineWebber or any third party. 3. The Company agrees to keep and hold confidential any and all customer information submitted to the Company by PaineWebber, except to the extent the use or release of such information to employees of the Company shall be necessary to properly service any contract issued in connection with the other provisions of this Agreement. In no event will the Company release any such information to its sales force, any other agent, mailing list company or to any other individual or organization where the Company has reason to know or suspect that the information so released will be used for marketing or solicitation purposes. Company acknowledges that applicants for its products are clients of PaineWebber and that information regarding those clients, including, but not limited to, name, address and telephone numbers, is owned by PaineWebber and provided to the Company solely in connection with the solicitation of applications for the Company's products and the issuance of said products by the Company. The Company agrees that any breach of this paragraph may cause irreparable harm to PaineWebber and that PaineWebber may seek injunctive or other appropriate equitable relief for a breach or threatened breach of this paragraph without first having to prove actual damages. 4. The Company agrees not to solicit the employment or hire any PaineWebber Investment Executive without the written consent of PaineWebber divisional management so long as a written sales agreement is in effect between our respective companies or their subsidiaries. PAINEWEBBER INCORPORATED by: /s/ Robert J. Bethoney ----------------------------- Robert J. Bethoney Senior Vice President SECURITY LIFE OF DENVER INSURANCE COMPANY /s/ Pamela Erbes - -------------------------------- ________________________________ EX-1.A(5)(A) 3 EXHIBIT 1.A(5) (A) EXHIBIT 1.A (5) SECURITY LIFE OF DENVER INSURANCE COMPANY INSURED: Mr JOHN DOE POLICY DATE: January 1, 1996 POLICY NUMBER: 5200001 STATED DEATH BENEFIT: $100,000.00 WE AGREE TO PAY the death benefit to the Beneficiary upon the death of the Insured while this Policy is in force. WE AGREE TO PAY your Net Account Value to you as of the Maturity Date if the Insured is living on that date. WE ALSO AGREE to provide the other rights and benefits of the Policy. These agreements are subject to the provisions of the Policy. RIGHT TO EXAMINE POLICY PERIOD. You have the right to examine and return this Policy within 10 days after receipt. The policy will be deemed to have been received by you 5 days after the policy is mailed from our Customer Service Center. The Policy may be returned by delivering or mailing it to us at our Customer Service Center. Immediately upon return it will be deemed void as of the Policy Date. Upon return of the Policy to us, we will refund all premiums paid. /s/ Eugene L. Copeland /s/ Stephen M. Christopher Secretary President In this Policy "you" and "your" refer to the Owner of the Policy. "We", "us" and "our" refer to Security Life of Denver Insurance Company. THIS POLICY IS A FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY. DEATH BENEFITS AND OTHER VALUES PROVIDED BY THIS CONTRACT, WHEN BASED ON THE INVESTMENT EXPERIENCE OF A SEPARATE ACCOUNT, ARE VARIABLE. THESE VALUES MAY INCREASE OR DECREASE BASED ON INVESTMENT EXPERIENCE AND ARE NOT GUARANTEED AS TO FIXED DOLLAR AMOUNT. DEATH BENEFITS ARE PAYABLE BY US UPON THE DEATH OF THE INSURED PRIOR TO THE MATURITY DATE. YOUR NET ACCOUNT VALUE, IF ANY, IS PAYABLE BY US IF THE INSURED IS LIVING AS OF THE MATURITY DATE. FLEXIBLE PREMIUMS ARE PAYABLE BY YOU DURING THE LIFETIME OF THE INSURED UNTIL THE MATURITY DATE. SECURITY LIFE OF DENVER INSURANCE COMPANY A Stock Company Customer Service Center P.O. BOX 173763, Denver, Colorado 80217-3763 Toll Free Number: 1(800)933-5858 Form 1197 (VUL)-5/97 TABLE OF CONTENTS SCHEDULE..................................................................... 5 DEFINITION OF TERMS.......................................................... 6 INSURANCE COVERAGE PROVISIONS................................................ 7 INITIAL PREMIUM ALLOCATION................................................ 7 VALUATION DATE............................................................ 7 VALUATION PERIOD.......................................................... 7 EFFECTIVE DATE OF COVERAGE................................................ 7 PAYOUT OF PROCEEDS........................................................ 7 BASE DEATH BENEFIT........................................................ 8 CHANGE IN REQUESTED INSURANCE COVERAGE.................................... 8 Requested Increases in Coverage........................................ 9 Requested Decreases in Coverage........................................ 9 Death Benefit Option Changes........................................... 9 PREMIUM PROVISIONS........................................................... 10 SCHEDULED PREMIUMS........................................................ 10 UNSCHEDULED PREMIUMS...................................................... 10 PREMIUM LIMITATION........................................................ 11 PREMIUM ALLOCATION........................................................ 11 VARIABLE ACCOUNT PROVISIONS.................................................. 11 THE VARIABLE ACCOUNT...................................................... 11 VARIABLE ACCOUNT DIVISIONS................................................ 11 CHANGES WITHIN THE VARIABLE ACCOUNT....................................... 12 GENERAL ACCOUNT PROVISIONS................................................... 12 THE GENERAL ACCOUNT....................................................... 12 GUARANTEED INTEREST DIVISION.............................................. 12 LOAN DIVISION............................................................. 13
Form 1197 (VUL) Page 2 TRANSFER PROVISIONS......................................................... 13 TRANSFERS TO OR FROM THE GUARANTEED INTEREST DIVISION.................... 13 EXCESS TRANSFER CHARGE................................................... 13 DOLLAR COST AVERAGING.................................................... 14 AUTOMATIC REBALANCING.................................................... 14 ACCOUNT VALUE PROVISIONS.................................................... 15 NET PREMIUM.............................................................. 15 ACCOUNT VALUES ON THE INVESTMENT DATE.................................... 15 ACCUMULATION UNIT VALUE.................................................. 16 ACCUMULATION EXPERIENCE FACTOR........................................... 16 ACCOUNT VALUE OF THE DIVISIONS OF THE VARIABLE ACCOUNT................... 16 ACCOUNT VALUE OF THE GUARANTEED INTEREST DIVISION........................ 17 ACCOUNT VALUE OF THE LOAN DIVISION....................................... 17 MONTHLY DEDUCTION AND REFUND................................................ 17 MONTHLY DEDUCTION........................................................ 17 COST OF INSURANCE........................................................ 18 PERSISTENCY REFUND....................................................... 18 LOAN PROVISIONS............................................................. 19 POLICY LOANS............................................................. 19 LOAN INTEREST............................................................ 19 LOAN DIVISION............................................................ 19 PARTIAL WITHDRAWAL PROVISIONS............................................... 20 SURRENDER PROVISIONS........................................................ 21 SURRENDER VALUE.......................................................... 21 SURRENDER CHARGES........................................................ 21 BASIS OF COMPUTATIONS.................................................... 22 FULL SURRENDERS.......................................................... 22 GRACE PERIOD, TERMINATION AND REINSTATEMENT PROVISIONS...................... 22 GRACE PERIOD............................................................. 22 THREE YEAR CONTINUATION PERIOD........................................... 22 GUARANTEE PERIOD......................................................... 23
Form 1197 (VUL) Page 3 TERMINATION................................................................ 23 REINSTATEMENT........................................................... 24 DEFERRAL OF PAYMENT..................................................... 24 GENERAL POLICY PROVISIONS.................................................. 25 THE POLICY.............................................................. 25 AGE..................................................................... 25 PROCEDURES.............................................................. 25 OWNERSHIP............................................................... 25 BENEFICIARIES........................................................... 26 EXCHANGE RIGHT.......................................................... 26 COLLATERAL ASSIGNMENT................................................... 26 INCONTESTABILITY........................................................ 26 MISSTATEMENT OF AGE OR SEX.............................................. 26 SUICIDE EXCLUSION....................................................... 27 PERIODIC REPORTS........................................................ 27 ILLUSTRATION OF BENEFITS AND VALUES..................................... 27 NONPARTICIPATING........................................................ 27 CUSTOMER SERVICE CENTER................................................. 27 PAYOUTS OTHER THAN AS ONE SUM.............................................. 27 ELECTION................................................................ 27 PAYOUT OPTIONS.......................................................... 28 CHANGE AND WITHDRAWAL................................................... 28 EXCESS INTEREST......................................................... 28 MINIMUM AMOUNTS......................................................... 29 SUPPLEMENTARY POLICY.................................................... 29 INCOME PROTECTION....................................................... 29 DEATH OF PRIMARY PAYEE.................................................. 29 PAYMENTS OTHER THAN MONTHLY............................................. 29 SETTLEMENT OPTION TABLES................................................... 30
Additional Benefits or Riders, if any, Will Be Listed in the Schedule. The Additional Provisions Will Be Inserted in the Policy. FORM 1197 (VUL) PAGE 4 SCHEDULE (Effective Date: January 1, 1996) POLICY INFORMATION Policy Number 5200001 Minimum Stated Death Benefit $50,000.00 Insured Mr JOHN DOE Death Benefit Option OPTION 1: GP/CVC LEVEL DB Age And Sex 35, Male Minimum Annual Premium $717.00 Premium Class High Band Non-Smoker Policy Date January 1, 1996 Scheduled Premium $1,000.00, Annually Maturity Date January 1, 2059
Definition of Life Insurance Test: Guideline Premium CUSTOMER SERVICE CENTER: P.O. BOX 173763, Denver, Colorado 80217-3763 Coverage will expire prior to the Maturity Date if Premiums are insufficient to continue coverage. Coverage will also be affected by Partial Withdrawals, Policy Loans, changes in the current cost of insurance rates, the actual credited interest rate for the Guaranteed Interest Division and the investment experience of the Variable Account. Form 1197 (VUL) Page 5 SCHEDULE (CONTINUED) BENEFIT PROFILE
- -------------------------------------------------------------------------------------------------------------------- Initial Segment Age At Guideline Benefit Issue Maturity Effective Annual Target Description Amount Age Date Date Premium Premium - -------------------------------------------------------------------------------------------------------------------- Stated Death Benefit (Segment #1) $100,000.00 35 100 January 1, 1996 $1,400.80 $941.00 - --------------------------------------------------------------------------------------------------------------------
Form 1197 (VUL) Page 5A SCHEDULE (CONTINUED) ALLOCATION OF INITIAL PREMIUM AS SHOWN ON APPLICATION Neuberger & Berman Limited Maturity Bond 50% Neuberger & Berman Growth 50% Neuberger & Berman Government Income 0% Neuberger & Berman Partners 0% Alger American Growth 0% Alger American Leveraged All Cap 0% Alger American Small Capital 0% Alger American MidCap Growth 0% Fidelity Asset Manager 0% Fidelity Growth 0% Fidelity Overseas 0% Fidelity Money Market 0% Fidelity Index 500 0% INVESCO Total Return 0% INVESCO Industrial Income 0% INVESCO High Yield 0% INVESCO Utilities 0% Van Eck Worldwide Balanced 0% Van Eck Gold and Natural Resources 0% Guaranteed Interest Division 0%
If you elect to invest in a particular Division, at least 1% of your Net Premium must be allocated to that Division provided that the allocation to each Division selected is at least $100. All percentage allocations must be in whole numbers. Form 1197 (VUL) Page 5B SCHEDULE (CONTINUED) EXPENSE CHARGES PREMIUM EXPENSE CHARGES (As a Percent of all Premiums): Sales Load: Segment Issue Age Sales Load 0 - 49 2.25% 50 - 59 3.25% 60+ 4.25% State And Local Taxes: 2.5% Federal Deferred Acquisition Cost Charge: 1.5% We reserve the right to increase or decrease the Premium Expense Charges for taxes due to any change in tax law. We further reserve the right to increase or decrease the Premium Expense Charges for Federal deferred acquisition costs due to any change in the cost to us. MONTHLY EXPENSE CHARGES: $13.00 per Policy month for the first 36 months $3.00 per Policy month thereafter; plus $0.0125 per thousand of Stated Death Benefit (or Target Death Benefit, if greater), all years. The per thousand charge is limited to $15.00 per Policy month. ANNUAL MORTALITY AND EXPENSE RISK CHARGE (Based on the percentage of assets in each Variable Account Division) Mortality And Expense Risk Charge 0.75% Form 1197 (VUL) Page 5C SCHEDULE (CONTINUED) SURRENDER CHARGES The maximum Surrender Charges which pertain to the insurance coverages shown in the Schedule are shown in the following table. This table may change upon any increases and/or decreases in the Policy's Stated Death Benefit.
----------------------------------------------- SURRENDERS DURING THE POLICY YEAR TOTAL MAXIMUM ENDING SURRENDER CHARGE ----------------------------------------------- 1997 $720.50 ----------------------------------------------- 1998 $720.50 ----------------------------------------------- 1999 $720.50 ----------------------------------------------- 2000 $720.50 ----------------------------------------------- 2001 $720.50 ----------------------------------------------- 2002 $720.50 ----------------------------------------------- 2003 $720.50 ----------------------------------------------- 2004 $630.44 ----------------------------------------------- 2005 $540.38 ----------------------------------------------- 2006 $450.31 ----------------------------------------------- 2007 $360.25 ----------------------------------------------- 2008 $270.19 ----------------------------------------------- 2009 $180.13 ----------------------------------------------- 2010 $90.06 ----------------------------------------------- 2011 0 -----------------------------------------------
ADMINISTRATIVE SURRENDER CHARGE TABLE
----------------------------------------------------------------------------- ADMINISTRATIVE SURRENDER SEGMENT CHARGE PER THOUSAND OF ISSUE AGE STATED DEATH BENEFIT ----------------------------------------------------------------------------- 0 - 39 $2.50 ----------------------------------------------------------------------------- 40 - 49 $3.50 ----------------------------------------------------------------------------- 50 - 59 $4.50 ----------------------------------------------------------------------------- 60 - 69 $5.50 ----------------------------------------------------------------------------- 70 and above $6.50 -----------------------------------------------------------------------------
This charge is reduced by 12.5% per year starting 7 Policy years after the segment's Effective Date until it reaches zero at the beginning of the 15th Policy year following that segment's Effective Date or the Policy year in which the Insured reaches age 98, whichever is earlier. Form 1197 (VUL) Page 5D SCHEDULE (CONTINUED) POLICYHOLDER TRANSACTION CHARGES Request for Sales Illustrations: $25 Premium Allocation Changes: $25 for each change over 5 per Policy year Excess Transfer Charge: See the Transfer Provisions section Partial Withdrawal Service Fee: See below POLICY LOANS Policy Loan Interest Rate: 3.75% per year Guaranteed Interest Rate Credited To Loan Division: 3.00% per year Minimum Loan Amount: $100 Maximum Loan Amount: See the Loan Provisions section. PARTIAL WITHDRAWALS Minimum Partial Withdrawal Amount: $100 Maximum Partial Withdrawal Amount: Amount which will leave $500 as the net Cash Surrender Value Partial Withdrawal Service Fee: The lesser of $25 or 2% of the amount withdrawn Limit On Partial Withdrawals: One per Policy year GUARANTEED INTEREST DIVISION Guaranteed Interest Rate For Guaranteed Interest Division 3.00% per year Form 1197 (VUL) Page 5E SCHEDULE (CONTINUED) DEFINITION OF LIFE INSURANCE DEATH BENEFIT FACTORS
- ------------------------------------------------------------------------------------- ATTAINED FACTOR ATTAINED FACTOR ATTAINED FACTOR ATTAINED FACTOR AGE AGE AGE AGE - ------------------------------------------------------------------------------------- 0 2.50 25 2.50 50 1.85 75 1.05 - ------------------------------------------------------------------------------------- 1 2.50 26 2.50 51 1.78 76 1.05 - ------------------------------------------------------------------------------------- 2 2.50 27 2.50 52 1.71 77 1.05 - ------------------------------------------------------------------------------------- 3 2.50 28 2.50 53 1.64 78 1.05 - ------------------------------------------------------------------------------------- 4 2.50 29 2.50 54 1.57 79 1.05 - ------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------- 5 2.50 30 2.50 55 1.50 80 1.05 - ------------------------------------------------------------------------------------- 6 2.50 31 2.50 56 1.46 81 1.05 - ------------------------------------------------------------------------------------- 7 2.50 32 2.50 57 1.42 82 1.05 - ------------------------------------------------------------------------------------- 8 2.50 33 2.50 58 1.38 83 1.05 - ------------------------------------------------------------------------------------- 9 2.50 34 2.50 59 1.34 84 1.05 - ------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------- 10 2.50 35 2.50 60 1.30 85 1.05 - ------------------------------------------------------------------------------------- 11 2.50 36 2.50 61 1.28 86 1.05 - ------------------------------------------------------------------------------------- 12 2.50 37 2.50 62 1.26 87 1.05 - ------------------------------------------------------------------------------------- 13 2.50 38 2.50 63 1.24 88 1.05 - ------------------------------------------------------------------------------------- 14 2.50 39 2.50 64 1.22 89 1.05 - ------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------- 15 2.50 40 2.50 65 1.20 90 1.05 - ------------------------------------------------------------------------------------- 16 2.50 41 2.43 66 1.19 91 1.04 - ------------------------------------------------------------------------------------- 17 2.50 42 2.36 67 1.18 92 1.03 - ------------------------------------------------------------------------------------- 18 2.50 43 2.29 68 1.17 93 1.02 - ------------------------------------------------------------------------------------- 19 2.50 44 2.22 69 1.16 94 1.01 - ------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------- 20 2.50 45 2.15 70 1.15 95 1.00 - ------------------------------------------------------------------------------------- 21 2.50 46 2.09 71 1.13 96 1.00 - ------------------------------------------------------------------------------------- 22 2.50 47 2.03 72 1.11 97 1.00 - ------------------------------------------------------------------------------------- 23 2.50 48 1.97 73 1.09 98 1.00 - ------------------------------------------------------------------------------------- 24 2.50 49 1.91 74 1.07 99 1.00 - ------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------- 100 1.00 - -------------------------------------------------------------------------------------
The policy's Base Death Benefit at any time will be at least equal to your Account Value times the appropriate factor from this table. Form 1197 (VUL) Page 5F SCHEDULE (CONTINUED) TABLE OF GUARANTEED RATES Guaranteed Maximum Cost of Insurance Rates Per $1000 (Basic Policy and Additional Insured Rider)
- ----------------------------------------------------------------------------------------------------------------------- Attained Monthly Cost of Attained Monthly Cost of Attained Monthly Cost of Attained Monthly Cost of Age Insurance Rate Age Insurance Rate Age Insurance Rate Age Insurance Rate - ----------------------------------------------------------------------------------------------------------------------- 0 0.34900 25 0.12675 50 0.41009 75 5.03724 - ----------------------------------------------------------------------------------------------------------------------- 1 0.08921 26 0.12342 51 0.44693 76 5.59039 - ----------------------------------------------------------------------------------------------------------------------- 2 0.08254 27 0.12175 52 0.48965 77 6.17549 - ----------------------------------------------------------------------------------------------------------------------- 3 0.08170 28 0.12008 53 0.53742 78 6.78686 - ----------------------------------------------------------------------------------------------------------------------- 4 0.07920 29 0.12208 54 0.59276 79 7.44038 - ----------------------------------------------------------------------------------------------------------------------- 5 0.07503 30 0.12008 55 0.65401 80 8.16249 - ----------------------------------------------------------------------------------------------------------------------- 6 0.07169 31 0.12258 56 0.72203 81 8.97320 - ----------------------------------------------------------------------------------------------------------------------- 7 0.06669 32 0.12509 57 0.79429 82 9.89813 - ----------------------------------------------------------------------------------------------------------------------- 8 0.06336 33 0.12926 58 0.87251 83 10.95204 - ----------------------------------------------------------------------------------------------------------------------- 9 0.06169 34 0.13427 59 0.96090 84 12.11846 - ----------------------------------------------------------------------------------------------------------------------- 10 0.06085 35 0.14094 60 1.05949 85 13.37460 - ----------------------------------------------------------------------------------------------------------------------- 11 0.06419 36 0.14762 61 1.16916 86 14.69860 - ----------------------------------------------------------------------------------------------------------------------- 12 0.07086 37 0.15680 62 1.29417 87 16.08129 - ----------------------------------------------------------------------------------------------------------------------- 13 0.08254 38 0.16682 63 1.43714 88 17.49682 - ----------------------------------------------------------------------------------------------------------------------- 14 0.09588 39 0.17851 64 1.59899 89 18.96601 - ----------------------------------------------------------------------------------------------------------------------- 15 0.10756 40 0.19103 65 1.77812 90 20.51212 - ----------------------------------------------------------------------------------------------------------------------- 16 0.11924 41 0.20607 66 1.97123 91 22.16549 - ----------------------------------------------------------------------------------------------------------------------- 17 0.12842 42 0.22110 67 2.18097 92 23.98724 - ----------------------------------------------------------------------------------------------------------------------- 18 0.13343 43 0.23865 68 2.40660 93 26.06643 - ----------------------------------------------------------------------------------------------------------------------- 19 0.13844 44 0.25619 69 2.65338 94 28.78427 - ----------------------------------------------------------------------------------------------------------------------- 20 0.14011 45 0.27709 70 2.93268 95 32.81758 - ----------------------------------------------------------------------------------------------------------------------- 21 0.13927 46 0.29966 71 3.30181 96 39.64294 - ----------------------------------------------------------------------------------------------------------------------- 22 0.13677 47 0.32391 72 3.61779 97 53.06605 - ----------------------------------------------------------------------------------------------------------------------- 23 0.13427 48 0.34984 73 4.04199 98 83.33333 - ----------------------------------------------------------------------------------------------------------------------- 24 0.13093 49 0.37912 74 4.52073 99 83.33333 - -----------------------------------------------------------------------------------------------------------------------
The rates shown are for a standard nonsmoker, smoker or juvenile rate class. If the Policy is based on a special rate class (other than standard nonsmoker, smoker or juvenile), the maximum cost of insurance rates will be adjusted using the rating factor shown in the Schedule for the special class. If the special rate class is a stated percentage increase, the maximum cost of insurance rates will be determined by multiplying the rates for a standard nonsmoker, smoker or juvenile rate class shown above by the rating factor shown in the Schedule. If the special rate class is a flat amount per $1,000, the maximum cost of insurance rates will be determined by adding the flat amount per $1,000 shown in the Schedule to the rate per $1,000 for the standard nonsmoker, smoker or juvenile rate class shown above. The rates shown above are based on the 1980 Commissioners Standard Ordinary Smoker Distinct Mortality Table, age nearest birthday. Form 1197 (VUL) Page 5G DEFINITION OF TERMS ACCOUNT VALUE--The sum of the amounts allocated to the Divisions of the Variable Account and to the Guaranteed Interest Division, as well as any amount set aside in the Loan Division to secure a Policy Loan. ACCUMULATION UNIT VALUE--The value of the Accumulation Units of each Division of the Variable Account. The Accumulation Unit Value is determined as of each Valuation Date. BASE DEATH BENEFIT--Initially this is the Stated Death Benefit under the Policy. The Base Death Benefit may be greater than the Stated Death Benefit depending on which death benefit option and which test for the Federal income tax law definition of life insurance you choose. CASH SURRENDER VALUE--The amount of your Account Value minus the Surrender Charge, if any. CUSTOMER SERVICE CENTER--Our administrative office at P.O. Box 173763, Denver, CO 80217-3763. DIVISION(S) OF THE VARIABLE ACCOUNT--The investment options available, each of which invests in shares of one of the Portfolios. GENERAL ACCOUNT--The account which contains all of our assets other than those held in the Variable Account or our other separate accounts. GUARANTEED INTEREST DIVISION--Part of our General Account to which a portion of the Account Value may be allocated and which provides guarantees of principal and interest. INVESTMENT DATE--The date on which the initial Net Premium we receive will be allocated to your Policy. We will not allocate funds to your Policy until we receive at least one quarter of the Minimum Annual Premium as shown in the Schedule attached to your Policy and we have approved your Policy for issue. LOAN DIVISION--Part of our General Account in which funds are set aside to secure any outstanding Policy Loan and accrued loan interest when due. MATURITY DATE--The date the Policy matures. This is the Policy anniversary on which the Insured's Age is 100. MONTHLY PROCESSING DATE--The date each month on which the monthly deductions from the Account Value are due. The first Monthly Processing Date will be the Policy Date or the Investment Date, if later. Subsequent Monthly Processing Dates will be the same date as the Policy Date each month unless this is not a Valuation Date, in which case the Monthly Processing Date occurs on the next Valuation Date. NET ACCOUNT VALUE--The amount of the Account Value minus any Policy Loan and accrued loan interest. NET CASH SURRENDER VALUE--The amount of the Cash Surrender Value minus any Policy Loan and accrued loan interest. NET PREMIUM--Premium amounts paid less the sales and tax charges. These charges are deducted from the premiums before the premium is applied to your Account Value. PARTIAL WITHDRAWAL--The withdrawal of a portion of your Net Cash Surrender Value from the Policy. The Partial Withdrawal may cause you to incur a Surrender Charge, and it may reduce the amount of Death Proceeds in force. POLICY LOAN--The sum of amounts you have borrowed from your Policy, increased by any Policy Loan interest capitalized when due, and reduced by any Policy Loan repayments. RIGHT TO EXAMINE POLICY PERIOD--The period of time within which the Owner may examine the Policy and return it for a refund. SCHEDULED PREMIUM--The premium amount which you specify on the application as the amount you intend to pay at fixed intervals over a specified period of time. We will send you premium reminder notices for the amount of the Scheduled Premium on a quarterly, semiannual, or annual basis, as you determine; you need not pay the Scheduled Premium, and you may change it at any time. Also, within limits, you may pay less or more than the Scheduled Premium. STATED DEATH BENEFIT--The initial amount of Base Death Benefit under the Policy. The Stated Death Benefit amount will not vary unless you change it. SURRENDER CHARGE--The charge made against your Account Value in the event of surrender, Policy lapse, requested reductions in the Stated Death Benefit, or certain Partial Withdrawals. The Surrender Charge consists of the administrative Surrender Charge and the sales Surrender Charge. VALUATION PERIOD--The period which begins at 4:00 p.m. Eastern Time on a Valuation Date and ends at 4:00 p.m. Eastern Time on the next succeeding Valuation Date. Form 1197 (VUL) Page 6 INSURANCE COVERAGE PROVISIONS INITIAL PREMIUM ALLOCATION We will not allocate funds to your Policy until we receive at least one quarter of the Minimum Annual Premium. The Minimum Annual Premium is listed in the Schedule. The Valuation Date on which we receive this amount and have approved your Policy for issue is the Investment Date. As of the Investment Date, the amount you have asked to be invested in the Divisions of the Variable Account will be allocated to the Fidelity Investments Money Market Division. Any amount you have designated for allocation to the Guaranteed Interest Division will be allocated to that Division. The amount allocated to the Fidelity Investments Money Market Division will remain there until the end of the Right to Examine Policy Period, at which time the balance will be transferred to the other Divisions of the Variable Account according to the allocations shown in the Schedule. VALUATION DATE A Valuation Date is any day: a) The New York Stock Exchange ("NYSE") is open for trading and on which Security Life's Customer Service Center is open for business; or b) As may be required by law. VALUATION PERIOD A Valuation Period begins at 4 p.m. Eastern time on a Valuation Date and ends at 4 p.m. Eastern time on the next succeeding Valuation Date. All Policy processing for a Valuation Period takes place as of the end of the Valuation Period. EFFECTIVE DATE OF COVERAGE The Policy date shown in the Schedule is the Effective Date for all coverage provided in the original application. The Effective Date is subject to the payment of at least one quarter of the Minimum Annual Premium and the acceptance of the Policy by you during the continued insurability of all persons insured by this Policy and any riders attached. The Policy date is the date from which we measure Policy years and determine the Monthly Processing Date. The first Monthly Processing Date is the Investment Date. Future Monthly Processing Dates are the same calendar day of each month as the Policy date unless this is not a Valuation Date in which case the Monthly Processing Date occurs on the next Valuation Date. A Policy anniversary occurs each year on the same month and day as the Policy date unless this is not a Valuation Date in which case the Policy anniversary occurs on the next Valuation Date. If the Policy date is February 29th, the Policy anniversary will be February 28th in years in which there is not a February 29th. The Effective Date for increases and additional benefits is shown in the Schedule. PAYOUT OF PROCEEDS The Payout of Proceeds is the amount we will pay: a) as of the Maturity Date, b) upon surrender of the Policy before the Maturity Date, or c) upon the death of the Insured before the Maturity Date. Form 1197 (VUL) Page 7 The Payout of Proceeds as of the Maturity Date will be your net Account Value. The Payout of Proceeds upon surrender of this Policy prior to the Maturity Date will be the net Cash Surrender Value. The Maturity Date is the Policy anniversary on which the Insured's Age is 100. The Insured's Age is the Age listed in the Schedule increased by the number of completed Policy years since the Policy date. The Payout of Proceeds upon the death of the Insured will be the Base Death Benefit; plus any amounts payable from any additional benefits provided by rider; minus any outstanding Policy Loan including accrued but unpaid interest; minus any unpaid monthly deductions incurred prior to the date of death. We will determine the amount of proceeds payable upon the death of the Insured when we have received due proof of death and any other information which is necessary to process the claim. Any proceeds we pay are subject to adjustments as provided in the Misstatement of Age or Sex, Suicide Exclusion and Incontestability provisions. We will pay Proceeds in one sum unless you request an alternate form of payment. There are many possible methods of payment. The available Payout Options are described in the Payouts Other Than As One Sum provision. Contact us or your agent for additional information. Interest will be paid on the one sum death Proceeds from the date we determine the death Proceeds to the date of payment, or until a Payout Option is selected. Interest will be at the rate we declare, or at any higher rate required by law. BASE DEATH BENEFIT The total Stated Death Benefit is the sum of the Stated Death Benefit for all coverage segments. The Stated Death Benefit for each coverage segment and the death benefit option are shown in the Schedule. The Base Death Benefit is determined by the death benefit option which you select as follows: Option 1 The Base Death Benefit equals the total Stated Death Benefit Option 2 The Base Death Benefit equals the total Stated Death Benefit, plus your Account Value. Option 3 The Base Death Benefit equals the total Stated Death Benefit, plus the sum of Premiums paid minus Partial Withdrawals taken. The Base Death Benefit at any time will be at least equal to your Account Value multiplied by the appropriate factor from the Definition of Life Insurance Factors table as shown in the Schedule. This Policy is designed to qualify as a life insurance contract under the Internal Revenue Code. All terms and provisions of the Policy shall be construed in a manner consistent with that design. The amount of insurance in force at any time shall not be less than the amount of insurance necessary to achieve such qualification under the applicable provisions of the Internal Revenue Code in existence at the time the Policy is issued. We reserve the right to amend the Policy or adjust the amount of insurance when required. We will send you a copy of any Policy amendment. CHANGE IN REQUESTED INSURANCE COVERAGE At least 30 days prior to a Policy anniversary, you may request that the insurance coverage be increased or decreased. You may not increase coverage after the Insured is Age 86. You may change the coverage only once each Policy year on the Policy anniversary. The change in coverage may not be for an amount less than $1,000. The Effective Date of the change will be the Policy anniversary next following the date the written application is approved by us. After any change to the Stated Death Benefit, you will receive a new Schedule which will include the Stated Death Benefit, the benefit under any riders, if applicable, the Guaranteed Cost of Insurance rates, the Guideline Annual Premium, the new Target Premium and the new Surrender Charge. Form 1197 (VUL) Page 8 REQUESTED INCREASES IN COVERAGE At least 30 days prior to a Policy anniversary, you may request an increase in the Stated Death Benefit. An increase will become effective as of the Policy anniversary after we have approved your application for increase. You must provide evidence satisfactory to us that the Insured is insurable according to our normal rules of underwriting for this type of Policy. This evidence will include an application and may include required medical information. An increase will consist of a new coverage segment of Stated Death Benefit subject to our limits. You will have the right to cancel an increase in the death benefit within the later of: a) 45 days after you sign the application for the increase, b) 20 days after you have received the new Schedule, or c) 10 days after we mail you the Notice of Withdrawal Right. The new Schedule will be deemed to have been received by you 15 days after it is mailed from our Customer Service Center. You may cancel an increase by sending notice in a form acceptable to us to our Customer Service Center. During this period, we will allocate the Premiums you pay related to the increase to the Fidelity Investments Money Market Division of the Variable Account. At the end of this period, the amount of the Premium remaining in the Fidelity Investments Money Market Division will be transferred to the Division of the Variable Account according to your most recent written allocation instruction. If you cancel an increase we will refund to you any charges attributable to the increase. An increase in the Stated Death Benefit will result in a new Sales Load. Premium allocated to an increase in coverage will be subject to a new Sales Load. REQUESTED DECREASES IN COVERAGE At least 30 days prior to a Policy anniversary, you may request a decrease in the Stated Death Benefit. A decrease will be effective as of the Policy anniversary. You may decrease the Stated Death Benefit if the Effective Date of the decrease will occur after the later of 2 years from the Policy date or 2 years after the most recent increase was made. A requested decrease will first reduce Adjustable Term Insurance Rider coverage segments, if any are attached to your Policy, beginning with the most recently added, and will then reduce each of the Stated Death Benefit segments in the same proportion as the total Stated Death Benefit is reduced. A Surrender Charge will apply if the Stated Death Benefit is decreased and the decrease occurs during the 14 years following the Policy date or the date of the prior increase. If a Surrender Charge applies, it will be deducted from your Account Value and future Surrender Charges will be reduced. The sum of the Stated Death Benefit for all coverage segments after any change may not be less than the minimum Stated Death Benefit shown in the Schedule. DEATH BENEFIT OPTION CHANGES At least 30 days prior to a Policy anniversary, you may request a change to the death benefit option. This change will be effective as of the Policy anniversary. A death benefit option change applies to the entire Stated Death Benefit. For us to approve a change to the death benefit option from Option 1 to Option 2, or from Option 1 to Option 3, you must submit evidence to us that the Insured is insurable according to our normal rules of underwriting for that class of policy. We may not allow any change if it would reduce the Stated Death Benefit below the minimum we require to issue this Policy at the time of reduction. After the Effective Date of the change, the Stated Death Benefit will be changed according to the following table: Form 1197 (VUL) Page 9
OPTION CHANGE FROM TO STATED DEATH BENEFIT FOLLOWING CHANGE EQUALS: Option 1 Option 2 Stated Death Benefit prior to such change minus your Account Value as of the Effective Date of the change. Option 2 Option 1 Stated Death Benefit prior to such change plus your Account Value as of the Effective Date of the change. Option 1 Option 3 Stated Death Benefit prior to such change minus the sum of the Premiums paid minus Partial Withdrawals taken as of the Effective Date of the change. Option 3 Option 1 Stated Death Benefit prior to such change plus the sum of the Premiums paid minus Partial Withdrawals taken as of the Effective Date of the change. Option 2 Option 3 Stated Death Benefit prior to such change plus i) your Account Value as of the Effective Date of the change, minus ii) the sum of the Premiums paid minus Partial Withdrawals taken as of the Effective Date of the change. Option 3 Option 2 Stated Death Benefit prior to such change plus i) the sum of the Premiums paid minus Partial Withdrawals taken as of the Effective Date of the change, minus ii) your Account Value as of the Effective Date of the change.
For purposes of death benefit option changes, your Account Value will be allocated to each coverage segment in the same proportion that the Stated Death Benefit of that segment bears to the sum of all Stated Death Benefit segments as of the Effective Date of the change. PREMIUM PROVISIONS SCHEDULED PREMIUMS The Scheduled Premium as shown in the Schedule may be paid while this Policy is in force during the Insured's lifetime. You may increase or decrease the amount of the Scheduled Premium, subject to limits we may set and provisions in the Premium Limitation Section. Under conditions provided in the Grace Period provision and the Guarantee Period, you may be required to make Premium payments to keep the Policy in force. We will send reminder notices to you for the Scheduled Premium amount and frequency that you have selected. You may select to receive notices either annually, semiannually or quarterly. You may also arrange for payment of Premiums on a monthly basis through an authorized special payment facility. All payment modes are subject to our minimum requirements for the payment mode selected. UNSCHEDULED PREMIUMS You may make unscheduled Premium payments at any time the Policy is in force during the Insured's lifetime. The unscheduled Premium payment must be at least $100. We may change this minimum if we give you 90 days written notice. Unless you tell us otherwise, these Premium payments will first be applied to reduce or pay off any existing Policy Loan and, as such, Premium Expense Charges will not be deducted. We may limit the amount of such unscheduled Premium payments if the payment would result in an increase in the Base Death Benefit. If the net amount at risk is increased as a result of an unscheduled Premium, we will require evidence of insurability satisfactory to us that the Insured is insurable according to our normal rules of underwriting for this type of Policy. The net amount at risk is the difference between the Base Death Benefit and your Account Value. Form 1197 (VUL) Page 10 PREMIUM LIMITATION If the Definition of Life insurance test used for your Policy is the Guideline Premium Test, we will not accept any Premium that causes your Policy not to qualify as a life insurance policy under the Internal Revenue Code. PREMIUM ALLOCATION During the Right to Examine Policy Period, the portion of your Net Premium which you have elected to invest in a Division of the Variable Account will be invested in the Fidelity Investments Money Market Division. After the Right to Examine Policy Period, the balance of your funds in the Fidelity Investments Money Market Division will be reallocated as you directed in your Premium allocation shown in the Schedule. After the Right to Examine Policy Period, each Net Premium will be allocated to the Divisions of the Variable Account and the Guaranteed Interest Division as you directed in the application or as otherwise requested. You may change the allocation for subsequent Premiums by sending us written notice at our Customer Service Center. If you change your Premium allocation more than 5 times per Policy year, we will deduct a charge from the Divisions of the Variable Account and the Guaranteed Interest Division in the same proportion that your Account Value of each Division bears to your net Account Value. The amount of this charge is shown in the Schedule. Premium allocation percentages may be in any whole number from 1% to 100% provided that at least $100 is allocated to each Division selected. VARIABLE ACCOUNT PROVISIONS THE VARIABLE ACCOUNT The Variable Account is an account established by us, pursuant to the laws of the State of Colorado, to separate the assets funding the benefits for the class of policies to which this Policy belongs from the other assets of Security Life of Denver. The Variable Account is registered as a unit investment trust under the Investment Company Act of 1940. All income, gains and losses, whether or not realized, from assets allocated to the Variable Account are credited to or charged against the Variable Account without regard to income, gains or losses of our General Account. The assets of the Variable Account are our property but are separate from our General Account and our other Variable Accounts. That portion of the assets of the Variable Account which is equal to the reserves and other Policy liabilities with respect to the Variable Account is not subject to creditor claims against us. VARIABLE ACCOUNT DIVISIONS The Variable Account is divided into Divisions, each of which invests in a series fund Portfolio designed to meet the objectives of the Division. The current eligible Divisions are shown in the Schedule. We may, from time to time, add additional Divisions. If we do, you may be permitted to select from these other Divisions subject to the terms and conditions we may impose on those allocations. We reserve the right to limit the number of Divisions in which you may invest. Form 1197 (VUL) Page 11 CHANGES WITHIN THE VARIABLE ACCOUNT When permitted by law, and subject to any required notice to you and approval of the Securities and Exchange Commission ("SEC"), state regulatory authorities or Policy Owners, we may from time to time make the following changes to the Variable Account: . Make additional Divisions available. These Divisions will invest in investment Portfolios we find suitable for the Policy. . Eliminate Divisions from the Variable Account, combine 2 or more Divisions, or substitute a new Portfolio for the Portfolio in which a Division invests. A substitution may become necessary if, in our judgment, a Portfolio no longer suits the purposes of the Policy. This may happen due to a change in laws or regulations, or a change in a Portfolio's investment objectives or restrictions. This may also happen if the Portfolio is no longer available for investment, or for some other reason, such as a declining asset base. . Transfer assets of the Variable Account, which we determine to be associated with the class of Policies to which your Policy belongs, to another Variable Account. . Withdraw the Variable Account from registration under the Investment Company Act of 1940. . Operate the Variable Account as a management investment company under the Investment Company Act of 1940. . Cause one or more Divisions to invest in a mutual fund other than or in addition to the Portfolios. . Discontinue the sale of Policies and certificates. . Terminate any employer or plan trustee agreement with us pursuant to its terms. . Restrict or eliminate any voting rights as to the Variable Account. . Make any changes required by the Investment Company Act of 1940 or the rules or regulations thereunder. GENERAL ACCOUNT PROVISIONS THE GENERAL ACCOUNT The General Account holds all of our assets other than those held in the Variable Account or our other separate accounts. The Guaranteed Interest Division is a part of our General Account. GUARANTEED INTEREST DIVISION The Guaranteed Interest Division is another Division to which you may allocate Premiums or make transfers. The Account Value of the Guaranteed Interest Division is equal to the Net Premium allocated to this Division plus any earned interest minus deductions taken from this Division. Interest is credited at the guaranteed rate shown in the schedule or may be credited at a higher rate. Any higher rate is guaranteed to be in effect for at least 12 months. Form 1197 (VUL) Page 12 LOAN DIVISION The Loan Division is the account which is set aside to secure the Policy Loan, if any. See the Loan Provision section for information. TRANSFER PROVISIONS After the Right to Examine Policy Period, your Account Value in each Division may be transferred to any other Division of the Variable Account upon written request. Transfers from the Guaranteed Interest Division are subject to the limitations as described in the Guaranteed Interest Division provision. The number of free transfers permitted in any one Policy year without an Excess Transfer Charge, the total number of transfers permitted and the Excess Transfer Charge are shown in the table below. Any transfers made due to the operation of the Automatic Rebalancing Feature or Dollar Cost Averaging will not count toward the transfers allowed free of charge. The minimum amount that may be transferred from each Division is the lesser of $100 or the balance of a Division. The following table summarizes the number of transfers available and the associated charges during any Policy year.
------------------------------------------------------------------------ FREE TRANSFERS 12 ------------------------------------------------------------------------ TOTAL NUMBER OF TRANSFERS PERMITTED Unlimited ------------------------------------------------------------------------ EXCESS TRANSFER CHARGE $25 for each transfer in excess of 12 during any Policy year. ------------------------------------------------------------------------
TRANSFERS TO OR FROM THE GUARANTEED INTEREST DIVISION Once during the first 30 days of each Policy year, you may transfer amounts from the Guaranteed Interest Division. Transfer requests received within 30 days prior to the Policy anniversary will be deemed to occur as of the Policy anniversary. Transfer requests received on the Policy anniversary or within the following 30 days will be processed; transfer requests received at any other time will not be processed. Transfers of your Account Value to the Guaranteed Interest Division are not limited to this 30-day period. The maximum transfer amount from the Guaranteed Interest Division in any Policy year is the greatest of: a) 25% of your Account Value in the Guaranteed Interest Division at the time of the first transfer or withdrawal in a Policy year; b) The minimum transfer amount; or c) The sum of the amounts transferred and withdrawn from the Guaranteed Interest Division in the prior Policy year. For purposes of calculating the maximum transfer from the Guaranteed Interest Division, all Partial Withdrawals and transfers from the Guaranteed Interest Division in a Policy year are summed. EXCESS TRANSFER CHARGE If you exceed the number of free transfers allowed, you will be assessed an Excess Transfer Charge. This charge will be deducted from each of the Divisions in which you are invested in the same proportion that the amount of Account Value in that Division bears to the net Account Value immediately after the transfer. Form 1197 (VUL) Page 13 DOLLAR COST AVERAGING If you have at least $10,000 of Account Value in either the Fidelity Investments Money Market Division or the Neuberger & Berman Limited Maturity Bond Division, you may choose to transfer a specified dollar amount each month from one of these Divisions to other Divisions of the Variable Account. Dollar Cost Averaging transfers may not be made to the Guaranteed Interest Division. The minimum amount that you may elect to transfer each month is $100. The maximum amount that you may transfer is equal to your Account Value in the Division from which the transfer is taken when the election is made, divided by 12. Dollar Cost Averaging may be elected to end on a specified date or when a specific balance remains in the Fidelity Investments Money Market Division or the Neuberger & Berman Limited Maturity Bond Division. Percentage allocations of the transfer amount must be designated as whole number percentages; no specific dollar designation may be made to the Divisions of the Variable Account. If you elect to transfer to a particular Division, the minimum percentage that may be transferred to that Division is 1% of the total amount transferred provided that the allocation is at least $100. The transfer date will be the same calendar day each month as the Monthly Processing Date. If this calendar day is not a Valuation Date, the next Valuation Date will be used. If, on any transfer date, your Account Value in the chosen Division is equal to or less than the amount you have elected to have transferred, the entire amount will be transferred, and this option will end. Dollar Cost Averaging may not begin until the Monthly Processing Date following the end of the Right to Examine Policy Period. You may change the transfer amount or the Divisions to which transfers are to be made once each Policy year. You may cancel this election by sending us written notice at our Customer Service Center at least 7 days before the next transfer date. Any transfer under this option will not be included for purposes of the Excess Transfer Charge. If you elect both Dollar Cost Averaging and Automatic Rebalancing, Dollar Cost Averaging will occur first. On the first Valuation Date of the next calendar quarter after Dollar Cost Averaging has terminated, Automatic Rebalancing will begin. AUTOMATIC REBALANCING Automatic Rebalancing allows you to match your Account Value in each Division to your allocation percentage for new Premiums. Automatic Rebalancing can be elected in your application or by completing the Automatic Rebalancing form and returning it to our Customer Service Center. As of the first Valuation Date of each calendar quarter thereafter we will reallocate your net Account Value so that the amount in each Division matches your Premium allocation. Automatic Rebalancing may not begin until the end of the Right to Examine Policy Period. While this feature is in effect, we require that you allocate no more than 35% of your Premiums to any one Division, and you must allocate your Premiums to at least 5 Divisions. If at any time during the operation of the Automatic Rebalancing feature you request a change in Premium allocation which does not meet these requirements, we will notify you that your allocation must be changed. We will not process such a request unless you also request that the Automatic Rebalancing feature be discontinued. When you request a change in Premium allocation that meets these requirements, your net Account Value will be reallocated as of the Valuation Date that we receive your written allocation instructions. Amounts will be transferred among the Divisions to match the allocation for new Premiums. Form 1197 (VUL) Page 14 During the operation of Automatic Rebalancing, you may not change your allocation percentage to the Guaranteed Interest Division by more than 25% of the percentage previously allocated to the Guaranteed Interest Division. If you change your Premium allocation more than five times per Policy year, there will be a $25 charge taken from your Account Value. This charge will be deducted from each of the Divisions of the Variable Account and the Guaranteed Interest Division in the same proportion that your Account Value of each Division bears to your net Account Value as of the Valuation Date the allocation change is effective. Any transfer as a result of the operation of Automatic Rebalancing will not be included in determining if the Excess Transfer Charge will apply. You may not transfer among Divisions while the Automatic Rebalancing feature is in effect. If you elect both Dollar Cost Averaging and Automatic Rebalancing, Dollar Cost Averaging will occur first. On the first Valuation Date of the next calendar quarter after Dollar Cost Averaging has terminated, Automatic Rebalancing will begin. ACCOUNT VALUE PROVISIONS The Account Value is the sum of the current amounts allocated to the Divisions of the Variable Account and to the Guaranteed Interest Division plus your balance in the Loan Division. The Account Value is based on the amount and number of Premiums paid, Policy and rider charges assessed, loans and withdrawals taken, monthly deductions, Premium Expense Charges, transaction charges, any Surrender Charges, and the investment experience or credited interest of the Division to which your Account Value is allocated. Your net Account Value is equal to your Account Value minus any Policy Loan and accrued but unpaid loan interest. NET PREMIUM The Net Premium equals the Premium paid minus the Premium Expense Charges for taxes and the appropriate Sales Load shown in the Schedule. Premiums allocated to an increase in coverage will be subject to a new Sales Load. Premiums are allocated in the same proportion that the Guideline Annual Premium of each segment bears to the sum of the Guideline Annual Premiums of all segments. The Guideline Annual Premium for each coverage segment is shown in the Schedule. ACCOUNT VALUES ON THE INVESTMENT DATE The Account Value of each Division of the Variable Account and the Guaranteed Interest Division as of the Investment Date is equal to: a) The allocation to that Division of the first Net Premium paid (as determined by you); minus b) The portion of any monthly deductions due on the Investment Date allocated to that Division. The Account Value of the Loan Division as of the Investment Date is equal to zero. Form 1197 (VUL) Page 15 ACCUMULATION UNIT VALUE The investment experience of a Division of the Variable Account is determined as of each Valuation Date. We use an Accumulation Unit Value to measure the experience of each of the Variable Account Divisions during a Valuation Period. We set the Accumulation Unit Value at $10 on the Valuation Date when the first investments in each Division of the Variable Account are made. The Accumulation Unit Value for a Valuation Period equals the Accumulation Unit Value for the preceding Valuation Period multiplied by the Accumulation Experience Factor for the Valuation Period. The number of units for a given transaction related to a Division of the Variable Account as of a Valuation Date is determined by dividing the dollar value of that transaction by that Division's Accumulation Unit Value for that date. ACCUMULATION EXPERIENCE FACTOR For each Division of the Variable Account, the Accumulation Experience Factor reflects the investment experience of the Portfolio in which that Division invests and the charges assessed against that Division for a Valuation Period. The Accumulation Experience Factor is calculated as follows: a) The net asset value of the Portfolio in which that Division invests as of the end of the current Valuation Period; plus b) The amount of any dividend or capital gains distribution declared and reinvested in the Portfolio in which that Division invests during the current Valuation Period; minus c) A charge for taxes, if any. d) The result of (a), (b) and (c) divided by the net asset value of the Portfolio in which that Division invests as of the end of the preceding Valuation Period; minus e) The daily equivalent of the Annual Mortality and Expense Risk Charge shown in the Schedule for each day in the current Valuation Period. ACCOUNT VALUE OF THE DIVISIONS OF THE VARIABLE ACCOUNT On subsequent Valuation Dates after the Investment Date, your Account Value of each Division of the Variable Account is calculated as follows: a) The number of Accumulation Units in that Division as of the beginning of the current Valuation Period multiplied by that Division's Accumulation Unit Value for the current Valuation Period; plus b) Any additional Net Premiums allocated to that Division during the current Valuation Period; plus c) Any Account Value transferred to or minus any Account Value transferred from the Variable Division during the current Valuation Period (including the applicable portion of any transfer fee); minus d) Any Partial Withdrawals allocated to that Division and any applicable withdrawal service fees which are allocated to the Variable Division during the current Valuation Period; plus e) Any amounts released from the Loan Division as a result of a loan or loan interest payment, or minus amounts transferred to the Loan Division as of a result of any loans which are allocated to the Variable Division during the current Valuation Period; minus f) The portion of any Surrender Charge resulting from a decrease in Stated Death Benefit allocated to the Division; minus g) The portion of the monthly deduction allocated to the Variable Division, if a Monthly Processing Date occurs during the current Valuation Period. Form 1197 (VUL) Page 16 ACCOUNT VALUE OF THE GUARANTEED INTEREST DIVISION On Valuation Dates after the Investment Date, your Account Value of the Guaranteed Interest Division is calculated as follows: a) The Account Value of the Guaranteed Interest Division at the end of the preceding Valuation Period plus interest at the declared rate credited during the current Valuation Period; plus b) Any additional Net Premiums allocated to the Guaranteed Interest Division plus interest credited to these Premiums during the current Valuation Period; plus c) Any Account Value transferred to or minus any Account Value transferred from the Guaranteed Interest Division during the current Valuation Period (including the applicable portion of any transfer fee); minus d) Any Partial Withdrawals taken and any applicable withdrawal service fees which are allocated to the Guaranteed Interest Division during the current Valuation Period; plus e) Any amounts released from the Loan Division as a result of a loan or loan interest payment, or minus amounts transferred to the Loan Division as a result of any loans which are allocated to the Guaranteed Interest Division during the current Valuation Period; minus f) The portion of any Surrender Charge resulting from a decrease in Stated Death Benefit allocated to the Guaranteed Interest Division, minus g) The portion of the monthly deduction allocated to the Division, if a Monthly Processing Date occurs during the current Valuation Period. ACCOUNT VALUE OF THE LOAN DIVISION On Valuation Dates after the Investment Date, your Account Value of the Loan Division is equal to: a) The Account Value of the Loan Division on the prior Valuation Date; plus b) Any interest credited to the Loan Division during the Valuation Period; plus c) An amount equal to any additional loans since the prior Valuation Date; minus d) Any loan repayments, including payment of loan interest in cash; plus e) The amount of accrued loan interest if the Valuation Date is a Policy anniversary; minus f) The amount of interest credited to the Loan Division during the year if the Valuation Date is a Policy anniversary. On Policy anniversaries, any amount of interest credited to the Loan Division during the year is transferred from the Loan Division to the Variable Account and Guaranteed Interest Divisions in the same proportion that your Account Value in each Variable Division and the Guaranteed Interest Division bears to your net Account Value as of the Policy anniversary. MONTHLY DEDUCTION AND REFUND MONTHLY DEDUCTION The monthly deduction is equal to: a) the cost of insurance charges for this Policy; plus b) the monthly charges for any other additional benefits provided by rider; plus c) the monthly expense charges shown in the Schedule. Form 1197 (VUL) Page 17 The monthly deductions allocated to the Divisions of the Variable Account and Guaranteed Interest Division in the same proportion that your Account Value in the Division bears to your net Account Value as of the Monthly Processing Date. This deduction is taken from your Account Value as of the Monthly Processing Date. COST OF INSURANCE The cost of insurance is determined on a monthly basis for each coverage segment. Such cost is the monthly cost of insurance rate for the Insured's Premium Class multiplied by the net amount at risk. The net amount at risk is (a) minus (b) where: a) is the Base Death Benefit for all coverage segments as of the Monthly Processing Date after the monthly deductions (other than cost of insurance charges for the Base Death Benefit, any Adjustable Term Insurance Rider and any Waiver of Monthly Deductions Rider), divided by 1 plus the monthly equivalent of the Guaranteed Interest Rate for the Guaranteed Interest Division as shown in the Schedule; and b) is your Account Value as of the Monthly Processing Date after the monthly deductions (other than the cost of insurance for the Base Death Benefit, any Adjustable Term Insurance Rider and any Waiver of Monthly Deduction Rider). The cost of insurance rates will be determined by us from time to time. They will be based on the sex and Age as of the Effective Date of coverage, the duration since the coverage began and the Premium Class. Any change in rates will apply to all individuals of the same Premium Class and whose policies have been in effect for the same length of time. The rates will never exceed those rates shown in the Table of Guaranteed Rates in the Schedule as adjusted for any special Premium Class. Each time there is a new coverage segment of Stated Death Benefit due to a requested increase, the net amount at risk will be allocated to each coverage segment in the same proportion that the Stated Death Benefit of that segment bears to the total Policy Stated Death Benefit. Different rates will apply to each segment depending upon the Premium Class, the Age as of the Effective Date of the increase and the duration since the Effective Date of the increase. PERSISTENCY REFUND Each month your Policy or a coverage segment of Stated Death Benefit remains in force after its tenth Policy anniversary, we will credit your Account Value with a refund equivalent to 0.5% of your Account Value on an annual basis for that segment (0.04167% monthly). Your Account Value will be allocated to each coverage segment based upon the number of completed Policy years the segment has been in force and the size of the Guideline Annual Premium for the segment as shown in the Schedule. The persistency refund will be added to the Divisions of the Variable Account and the Guaranteed Interest Division in the same proportion that your Account Value in each Division bears to your net Account Value as of the Monthly Processing Date. Form 1197 (VUL) Page 18 LOAN PROVISIONS POLICY LOANS You may obtain a Policy Loan after the first Policy anniversary. The maximum amount you may borrow at any time equals (a) minus (b) where (a) is equal to: 1. Account Value minus (12 times the current monthly deduction); 2. Multiplied by (1 + Policy Loan Interest Rate); 3. Divided by (1 + Guaranteed Interest Rate credited to Loan Division); and where (b) is equal to any outstanding Policy Loan and accrued loan interest. The Policy Loan is a first lien on your Policy. The minimum amount you may borrow is shown in the Schedule. The outstanding Policy Loan amount is equal to the loan amount as of the beginning of the Policy year plus new loans and minus loan repayments. LOAN INTEREST The annual Policy Loan interest rate is shown in the Schedule. If a loan is made, interest is due and payable at the end of the Policy year. Thereafter, interest on the loan amount is due annually at the end of each Policy year until the loan is repaid. If interest is not paid when due, it is added to the Policy Loan. If the Policy Loan amount and any accrued interest equals or exceeds the Cash Surrender Value, a Premium sufficient to keep this Policy in force must be paid as provided in the Grace Period Provision. LOAN DIVISION When a Policy Loan is taken or when interest is not paid in cash when due, an amount equal to the loan is transferred from the Divisions of the Variable Account and the Guaranteed Interest Division to the Loan Division to secure the loan. This amount will be deducted from the Divisions of the Variable Account and the Guaranteed Interest Division in the same proportion that your Account Value in each Division bears to your net Account Value as of the date the transfer is effective. Your Account Value in the Loan Division will be credited with interest at the interest rate for the Loan Division shown in the Schedule. When a loan repayment is made an amount equal to the repayment is transferred from the Loan Division to the Guaranteed Interest Division and the Divisions of the Variable Account in the same proportion as your current Premium allocation unless you request a different allocation. Form 1197 (VUL) Page 19 PARTIAL WITHDRAWAL PROVISIONS You may apply for a Partial Withdrawal of your Account Value on any Monthly Processing Date after the first Policy anniversary by writing to us at our Customer Service Center. The minimum and maximum Partial Withdrawal amounts are shown in the Schedule. When a Partial Withdrawal is made, the amount of the withdrawal plus a service fee is deducted from your Account Value. The amount of the service fee is shown in the Schedule. We limit the number of Partial Withdrawals in a Policy year and this number is shown in the Schedule. If the Stated Death Benefit is reduced by a Partial Withdrawal during the first 14 years following the Policy date or following an increase in the Stated Death Benefit, a Surrender Charge will be deducted from your Account Value. The Stated Death Benefit is not reduced by a Partial Withdrawal taken when the Base Death Benefit has been increased to qualify your Policy as life insurance under the Federal income tax laws and the amount withdrawn is no greater than that which reduces your Account Value to the level which no longer requires the Base Death Benefit to be increased for Federal income tax law purposes. For a Policy under an Option 1 death benefit, the Stated Death Benefit is not reduced by a Partial Withdrawal in the circumstances described above. In addition, if no more than 16 years have elapsed since the Policy date and the Insured is not yet Age 81, a Partial Withdrawal of an amount up to 10% of your Account Value or, if greater, 5% of the Stated Death Benefit, calculated immediately before the Partial Withdrawal is taken will not reduce the Stated Death Benefit. Any additional amount withdrawn reduces your Stated Death Benefit by that additional amount. For a Policy under an Option 2 death benefit, a Partial Withdrawal does not reduce your Stated Death Benefit. For a Policy under an Option 3 death benefit, your Stated Death Benefit will be reduced by any amount of the Partial Withdrawal in excess of Premiums paid to the date of the Partial Withdrawal. Any reduction in death benefit or Account Value will occur as of the date the Partial Withdrawal occurs. No Partial Withdrawal will be allowed if the Stated Death Benefit remaining in force after any such Partial Withdrawal would be reduced below the minimum Stated Death Benefit shown in the Schedule. For a Policy under an Option 2 or Option 3 death benefit, a Partial Withdrawal reduces the Base Death Benefit by the amount of the withdrawal. Under any death benefit option, if the Base Death Benefit has been increased in order to qualify your Policy as a life insurance contract under the Federal income tax laws, the Partial Withdrawal reduces the Base Death Benefit by an amount greater than the withdrawal. If the Stated Death Benefit is reduced during the first 7 years of a coverage segment, a new Target Premium will be calculated and future maximum Surrender Charges will be reduced. If the Stated Death Benefit is reduced after the first 7 years of a coverage segment, the Surrender Charge is reduced in the same proportion that the Stated Death Benefit is reduced. You may specify how much of the withdrawal you wish taken from each Division of the Variable Account or from the Guaranteed Interest Division. You may not withdraw from the Guaranteed Interest Division more than the total withdrawal times the ratio of your Account Value in the Guaranteed Interest Division to your net Account Value immediately prior to the withdrawal. Unless you indicate otherwise, we will make the withdrawal from the amounts in the Guaranteed Interest Division and the Divisions of the Variable Account in the same proportion that your Account Value in each Division bears to your net Account Value immediately prior to the withdrawal. The withdrawal service fee and any Surrender Charge deducted from your Account Value is deducted from each Variable Division and the Guaranteed Interest Division in the same proportion that your Account Value of each Division bears to your net Account Value immediately after the withdrawal. Form 1197 (VUL) Page 20 We may send you a new Schedule to reflect the effect of the withdrawal, including any change to the Stated Death Benefit and Surrender Charges. We may ask you to return your Policy to our Customer Service Center to make this change. The withdrawal and the reductions in death benefits will be effective as of the Valuation Date after we receive your request. SURRENDER PROVISIONS SURRENDER VALUE The net Cash Surrender Value on any date will be your Account Value minus any applicable Surrender Charge and minus any Policy Loan including accrued but unpaid loan interest. SURRENDER CHARGES A separate Surrender Charge will apply to each Stated Death Benefit coverage segment. The Surrender Charge for this Policy is the sum of the Surrender Charge for each coverage segment of Stated Death Benefit. The Surrender Charge will not exceed the total maximum Surrender Charge shown in the Schedule. For purposes of calculating the Surrender Charge for a coverage segment, Premiums are allocated to a segment in the same proportion that the Guideline Annual Premium of each segment bears to the sum of the Guideline Annual Premiums of all segments. The Guideline Annual Premium for each coverage segment is shown in the Schedule. For each segment, the Surrender Charge consists of an administrative Surrender Charge and a sales Surrender Charge. The administrative Surrender Charge for each segment is determined from the administrative Surrender Charge table in the Schedule. It depends on the segment's Issue Age, Effective Date and initial Stated Death Benefit which are in the Schedule. For the first 7 Policy years following the Effective Date of a segment, the sales Surrender Charge is the lesser of: 50% of the target Premium for the segment; or 25% of the sum of all Premiums paid up to the target Premium for the segment plus 5% of the sum of all Premiums paid in excess of the target Premium for the segment. Thereafter, the sales Surrender Charge for the segment decreases at the beginning of each year following the 7th Policy year from the Effective Date of the segment by 12.5% of the sales Surrender Charge in effect at the end of the 7th Policy Year until it reaches zero at the beginning of the 15th Policy year following the segment's Effective Date or the Policy year the Insured reaches age 98, whichever is sooner. During the first 14 Policy years or within 14 years of the Effective Date of an increase in the Stated Death Benefit segment, if you request a decrease to the Stated Death Benefit or take a Partial Withdrawal which causes the Stated Death Benefit to decrease, the administrative Surrender Charge will decrease in the same proportion that the Stated Death Benefit decreases. Upon a decrease in the Stated Death Benefit, a portion of the Surrender Charge will be deducted from your Account Value. The amount of the Surrender Charge which will be deducted from your Account Value will equal the Surrender Charge in effect before the decrease minus the Surrender charge in effect after the decrease. If a decrease to the Stated Death Benefit occurs after the first 7 years of a coverage segment, the maximum Surrender Charges for the remaining Policy will be reduced by the percentage that the Stated Death Benefit is decreased. If a decrease occurs during the first 7 years of a coverage segment, the Target Premium will be recalculated; future maximum Surrender Charges for that coverage segment will be reduced. A Surrender Charge is not deducted from your Account Value if the Stated Death Benefit is decreased because the death benefit option is changed. Form 1197 (VUL) Page 21 BASIS OF COMPUTATIONS The Cash Surrender Value under the Policy is not less than the minimums required as of the Policy date by the state in which your Policy was delivered. A detailed statement of the method of computation of Policy values under the Policy has been filed with the insurance department of the state in which the Policy was delivered, if required. FULL SURRENDERS You may surrender your Policy after the Right to Examine Policy Period or at any time during the lifetime of the Insured and receive the net Cash Surrender Value. We will compute the net Cash Surrender Value as of the next Valuation Date after we receive both your request and the Policy at our Customer Service Center. This Policy will be canceled as of the date we receive your request, and there will be no further benefits under this Policy. GRACE PERIOD, TERMINATION AND REINSTATEMENT PROVISIONS GRACE PERIOD If the following three conditions occur on a Monthly Processing Date, the Policy will enter into the 61 day Grace Period: a) The net Cash Surrender Value is zero or less, and b) The Guarantee Period shown in the Schedule and described below has expired or been terminated, and c) The three year continuation period described below has expired or the required Premium for the three year continuation period has not been paid. We will give you a 61 day Grace Period from this Monthly Processing Date to make the required Premium payment. The required Premium payment then due must be paid to keep the Policy in force. If this amount is not received in full by the end of the Grace Period, the Policy will lapse without value. The required Premium payment will be equal to past due charges plus an amount we expect to be sufficient to keep the Policy and any riders in force for 2 months following the receipt of the required Premium payment. If we receive at least the required Premium payment during the Grace Period we will make deductions from the Net Premium payment for the past due amounts and apply any remaining amount as Premium to the Policy. Notice of the amount of the required Premium payment will be mailed to you or any assignee at the last known address at least 30 days before the end of the Grace Period. If the Insured dies during the Grace Period, we will deduct any overdue monthly deductions from the death Proceeds of the Policy. THREE YEAR CONTINUATION PERIOD During the first 3 Policy years, if at all times the sum of your Premiums paid minus the sum of your Partial Withdrawals, Policy Loans taken and accrued but unpaid interest, is greater than or equal to: one-twelfth of the Minimum Annual Premium multiplied by the number of complete months your Policy has been in force, your Policy will remain in force regardless of the net Cash Surrender Value. The Minimum Annual Premium is shown in the Schedule. If you increase the Stated Death Benefit during the first 3 Policy years, the new Schedule will show a revised Minimum Annual Premium which will be used for future tests to determine if your Policy will remain in force under this provision. Form 1197 (VUL) Page 22 GUARANTEE PERIOD The Policy will not be terminated during the Guarantee Period even if the net Cash Surrender Value is zero. The Guarantee Period is the period you have selected in your application and will expire on the date shown in the Schedule. If you have selected the lifetime Guarantee Period, the Guarantee Period will expire on the Maturity Date shown in the Schedule. The Guarantee Period will be terminated prior to the selected date if, on any Monthly Processing Date: a) The actual Premiums paid, minus the amount of any Partial Withdrawals and any Policy Loan including accrued but unpaid interest, are less than b) One twelfth the Guarantee Period Annual Premium multiplied by the number of complete months the Policy has been in force. If you have increased your death benefit, your Guarantee Period Annual Premium is increased. In order to determine the required premium to maintain your Guarantee Period, one-twelfth of each Guarantee Period Annual Premium is multiplied by the number of months this Premium amount was in effect. Each of these resulting amounts is summed and the total is used in (b) above. The Guarantee Period will also be terminated if your Account Value on any Monthly Processing Date is not diversified according to the following rules: a) No more than 35% of your net Account Value may be invested in any one Division, and b) Your net Account Value must be invested in at least 5 Divisions. You will satisfy these diversification requirements if i) you are participating in the Automatic Rebalancing Feature, or ii) you elect Dollar Cost Averaging and direct the resulting transfers into at least 4 other Divisions with no more than 35% of any transfer being to any one Division. The Guarantee Period will apply to the Stated Death Benefit which is shown on the original Schedule and to any subsequent coverage segments of Stated Death Benefit which are added after the Policy date. The Guarantee Period Annual Premium is shown in the Schedule. TERMINATION All coverage provided by this Policy will end as of the earliest of: a) The date the Policy is surrendered; b) The date of death of the Insured; c) The Maturity Date of the Policy; or d) The date the Grace Period ends without payment of the required Premium. Form 1197 (VUL) Page 23 REINSTATEMENT The Policy may be reinstated within five years after the beginning of the Grace Period. The reinstatement will be effective as of the Monthly Processing Date on or next following the date we approve your written application. We will reinstate the Policy and any riders if the following conditions are met: a) You have not surrendered the Policy for its net Cash Surrender Value; b) You submit evidence satisfactory to us that the Insured and those insured under any riders are still insurable according to our normal rules of underwriting for this type of Policy; and c) We receive payment of the amount of Premium sufficient to keep the Policy and any riders in force from the beginning of the Grace Period to the end of the expired Grace Period and for 2 months after the date of reinstatement. We will let you know, at the time you request reinstatement, the amount of Premium needed for this purpose. The Surrender Charge as of the date of reinstatement will equal the Surrender Charge as of the beginning of the Grace Period. We will reinstate any Policy Loan, with accrued loan interest to the end of the Grace Period, which existed when coverage ended. Upon reinstatement, the Net Premium received minus past due amounts will be allocated to the Divisions of the Variable Account and the Guaranteed Interest Division according to the Premium allocation percentages in effect at the start of the Grace Period or as directed by you in writing at the time of reinstatement. DEFERRAL OF PAYMENT Requests for transfers, withdrawals, payment of proceeds on the Maturity Date or a full surrender will be processed within 7 days of receipt of the request in a form acceptable to us. However, we may postpone the processing of any such Variable Account transactions for any of the following reasons: a) The NYSE is closed, other than customary weekend and holiday closings. b) Trading on the NYSE is restricted by the SEC. c) The SEC declares that an emergency exists as a result of which disposal of securities in the Variable Account is not reasonably practicable to determine your Account Value in the Divisions. d) A governmental body having jurisdiction over the Variable Account by order permits such suspension. Rules and regulations of the SEC, if any, are applicable and will govern as to whether conditions described in (b), (c), or (d) exist. Death proceeds will be paid within 7 days of determination of the proceeds and are not subject to deferment. We may defer for up to 6 months payment of any surrender proceeds, withdrawal or loan amounts from the Guaranteed Interest Division. Form 1197 (VUL) Page 24 GENERAL POLICY PROVISIONS THE POLICY The Policy, including the original application and applications for an increase, riders, endorsements, any Schedule pages, and any reinstatement applications make up the entire contract between you and us. A copy of the original application will be attached to the Policy at issue. A copy of any application as well as a new Schedule will be attached or furnished to you for attachment to the Policy at the time of any change in coverage. In the absence of fraud, all statements made in any application will be considered representations and not warranties. No statement will be used to deny a claim unless it is in an application. AGE The Policy is issued at the Age shown in the Schedule. This is the Insured's Age nearest birthday on the Policy date. The Insured's Age at any time is the Age shown in the Schedule increased by the number of completed Policy years. PROCEDURES We must receive any election, designation, assignment or any other change request you make in writing, except those specified on the application. It must be in a form acceptable to us. We may require a return of the Policy for any change or for a full surrender. We are not liable for any action we take before we receive and record the written request at our Customer Service Center. In the event of the death of the Insured before the Maturity Date, please let us or our agent know as soon as possible. Claim procedure instructions will be sent to the Beneficiary immediately. We may require proof of Age and a certified copy of the death certificate. We may require the Beneficiary and next of kin to sign authorizations as part of due proof. These authorization forms allow us to obtain information about the Insured, including, but not limited to, medical records of physicians and hospitals used by the Insured. OWNERSHIP The original Owner is the person named as the Owner in the application. You, as the Owner, can exercise all rights and receive the benefits during the Insured's life before the Maturity Date. This includes the right to change the Owner, Beneficiaries, and methods for the payment of proceeds. All rights of the Owner are subject to the rights of any assignee and any irrevocable Beneficiary. You may name a new Owner by sending written notice to us. The Effective Date of the change to the new Owner will be the date you sign the notice. The change will not affect any payment made or action taken by us before recording the change at our Customer Service Center. Form 1197 (VUL) Page 25 BENEFICIARIES The primary Beneficiary surviving the Insured will receive any death Proceeds which become payable. Surviving contingent Beneficiaries are paid death Proceeds only if no primary Beneficiary has survived the Insured. If more than one Beneficiary in a class survives the Insured, they will share the death Proceeds equally, unless your designation provides otherwise. If there is no designated Beneficiary surviving, you or your estate will be paid the death Proceeds. The Beneficiary designation will be on file with us or at a location designated by us. While you are living, you may name a new Beneficiary. The Effective Date of the change will be the date the request was signed. We will pay proceeds to the most recent Beneficiary designation on file. We will not be subject to multiple payments. EXCHANGE RIGHT If, for any reason within the first 2 Policy years or within 2 years of the Effective Date of an increase, you want to exchange this Policy for a Policy in which values do not vary with the investment experience of the Variable Account, we will exchange this Policy. This transfer will not be subject to the Excess Transfer Charge. The exchange will be implemented by transferring your Account Value in all the Divisions of the Variable Account to the Guaranteed Interest Division and removing your future right to choose to allocate funds to the Divisions of the Variable Account. We will require a return of this Policy before this change will be processed. COLLATERAL ASSIGNMENT You may assign this Policy as collateral security by written notice to us. Once it is recorded with us, the rights of the Owner and Beneficiary are subject to the assignment. It is your responsibility to make sure the assignment is valid. INCONTESTABILITY After this Policy has been in force during the Insured's life for 2 years from the Policy date, we will not contest the statements in the application attached at issue. After this Policy has been in force during the Insured's life for 2 years from the Effective Date of any increase in any benefit with respect to the Insured, we will not contest the statements in the application for the increase. After this Policy has been in force during the Insured's life for 2 years from the Effective Date of any reinstatement, we will not contest the statements in the application for such reinstatement. MISSTATEMENT OF AGE OR SEX If the Age or sex of the Insured has been misstated, the death benefit will be adjusted. The death benefit will be that which the cost of insurance which was deducted from your Account Value on the last Monthly Processing Date prior to the death of the Insured would have purchased for the Insured's correct Age and sex. Form 1197 (VUL) Page 26 SUICIDE EXCLUSION If the Insured commits suicide, while sane or insane, within 2 years of the Policy date, we will make a limited payment to the Beneficiary. We will pay in one sum the amount of all Premiums paid to us during that time, minus any outstanding Policy Loan (including accrued but unpaid interest) and Partial Withdrawals. If the Insured commits suicide, while sane or insane, within 2 years of the Effective Date of an increase in the Stated Death Benefit, we will make a limited payment to the Beneficiary for the increase. This payment will equal the cost of insurance and any applicable monthly expense charges deducted for such increase. PERIODIC REPORTS We will send you at least once each year a report which shows the current Account Value, Cash Surrender Value and Premiums paid since the last report. The report will also show the allocation of your Account Value as of the date of the report and the amounts added to or deducted from your Account Value of each Division since the last report. The report will include any other information that may be currently required by the insurance supervisory official of the jurisdiction in which this Policy is delivered. ILLUSTRATION OF BENEFITS AND VALUES We will send you, upon written request, a hypothetical illustration of future death benefits and Account Values. This illustration will include the information as required by the laws or regulations where this Policy is delivered. If you request more than one illustration during a Policy year, we will charge a reasonable fee for each additional illustration. The maximum amount of this fee is shown in the Schedule. NONPARTICIPATING The Policy does not participate in our surplus earnings. CUSTOMER SERVICE CENTER Our Customer Service Center is at the address shown in the Schedule. Unless you are otherwise notified: a) All requests and payments should be sent to us at our Customer Service Center; and b) All transactions are effective as of the Valuation Date the required information is received at our Customer Service Center. PAYOUTS OTHER THAN AS ONE SUM ELECTION During the Insured's lifetime, you may elect that the Beneficiary receive the proceeds upon death of the Insured other than in one sum. If you have not made an election, the Beneficiary may do so within 60 days after the Insured's death. You may also elect to take the net Cash Surrender Value of the Policy upon its surrender other than in one sum. Satisfactory written request must be received at our Customer Service Center before payment can be made. A payee that is not a natural person may not be named without our consent. The various methods of settlement are described in the following Payout Options section. Form 1197 (VUL) Page 27 PAYOUT OPTIONS OPTION I. PAYOUTS FOR A DESIGNATED PERIOD. Payouts will be made in 1, 2, 4, or 12 installments per year as elected for a designated period, which may be 5 to 30 years. The installment dollar amounts will be equal except for any Excess Interest as described below. The amount of the first monthly payout for each $1,000 of Account Value applied is shown in Settlement Option Table I. OPTION II. LIFE INCOME WITH PAYOUTS FOR DESIGNATED PERIOD. Payouts will be made in 1, 2, 4, or 12 installments per year throughout the payee's lifetime, or if longer, for a period of 5, 10, 15 or 20 years as elected. The installment dollar amounts will be equal except for any Excess Interest, as described below. The amount of the first monthly payout for each $1,000 of Account Value applied is shown in Settlement Option Table II. This option is not available for ages not shown in the Table. OPTION III. HOLD AT INTEREST. Amounts may be left on deposit with us to be paid upon the death of the payee or at any earlier date elected. Interest on any unpaid balance will be at the rate declared by us or at any higher rate required by law. Interest may be accumulated or paid in 1, 2, 4, or 12 installments per year, as elected. Money may not be left on deposit for more than 30 years. OPTION IV. PAYOUTS OF A DESIGNATED AMOUNT. Payouts will be made until proceeds, together with interest, which will be at the rate declared by us or at any higher rate required by law, are exhausted. Payouts will be made in 1, 2, 4, or 12 equal installments per year, as elected. OPTION V. OTHER. Settlement may be made in any other manner as agreed upon in writing between you (or the Beneficiary) and us. CHANGE AND WITHDRAWAL You may change an election at any time before the death of the Insured or maturity of the Policy. If you have given the Beneficiary the right to make changes or withdrawals, or if the Beneficiary has elected the option, the Beneficiary (as primary payee) may take the actions below. a) Changes may be made from Payout Options I, III, and IV to another option. b) Full withdrawals may be made under Payout Option III or IV. Partial Withdrawals of not less than $300 may be made under Payout Option III. c) Remaining installments under Payout Option I may be commuted at 3 1/2% interest and received in one sum. d) Changes in any contingent payee designation may be made. A written request must be sent to our Customer Service Center in writing to make a change or withdrawal. We also may require that you send in the Supplemental Policy. We may defer payment of commuted and withdrawable amounts for a period up to 6 months. EXCESS INTEREST If we declare that Payout Options are to be credited with an interest rate above that guaranteed, it will apply to Payout Options I, II, III, and IV. The crediting of excess interest for one period does not guarantee the higher rate for other periods. Any declared interest rate will be in effect for at least 12 months. Form 1197 (VUL) Page 28 MINIMUM AMOUNTS The minimum amount which may be applied under any option is $2,000. If the payments to the payee are ever less than $20, we may change the frequency of payments so as to result in payments of at least that amount. SUPPLEMENTARY POLICY When an option becomes effective, the Policy will be surrendered in exchange for a Supplementary Policy. It will provide for the manner of settlement and rights of the payees. The Supplementary Policy's Effective Date will be the date of the Insured's death or the date of other settlement. The first payment under Options I, II, and IV will be payable as of the Effective Date. The first interest payment under Option III will be made as of the end of the interest payment period elected. Subsequent payments will be made in accordance with the frequency of payment elected. The Supplementary Policy may not be assigned or payments made to another without our consent. INCOME PROTECTION Unless otherwise provided in the election, a payee does not have the right to commute, transfer or encumber amounts held or installments to become payable. To the extent provided by law, the proceeds, amount retained, and installments are not subject to any payee's debts, polices, or engagements. DEATH OF PRIMARY PAYEE Upon the primary payee's death, any payments certain under Option I or II, interest payments under Option III, or payments under Option IV will be continued to the contingent payee. Or, amounts may be released in one sum if permitted by the Policy. The final payee will be the estate of the last to die of the primary payee and any contingent payee. PAYMENTS OTHER THAN MONTHLY The tables which follow show monthly installments for Options I and II. To arrive at annual, semiannual, or quarterly payments, multiply the appropriate figures by 11.813, 5.957 or 2.991 respectively. Factors for other periods certain or for other options which may be provided by mutual agreement will be provided upon reasonable request. Form 1197 (VUL) Page 29 SETTLEMENT OPTION TABLE I (Per $1,000 of Net Proceeds)
- ------------------------------------------------------------- No. of Monthly No. of Monthly Years Payable Installments Years Payable Installments - ------------------------------------------------------------- 1 $84.65 16 6.76 - ------------------------------------------------------------- 2 43.05 17 6.47 - ------------------------------------------------------------- 3 29.19 18 6.20 - ------------------------------------------------------------- 4 22.27 19 5.97 - ------------------------------------------------------------- 5 18.12 20 5.75 - ------------------------------------------------------------- - ------------------------------------------------------------- 6 15.35 21 5.56 - ------------------------------------------------------------- 7 13.38 22 5.39 - ------------------------------------------------------------- 8 11.90 23 5.24 - ------------------------------------------------------------- 9 10.75 24 5.09 - ------------------------------------------------------------- 10 9.83 25 4.96 - ------------------------------------------------------------- - ------------------------------------------------------------- 11 9.09 26 4.84 - ------------------------------------------------------------- 12 8.46 27 4.73 - ------------------------------------------------------------- 13 7.94 28 4.63 - ------------------------------------------------------------- 14 7.49 29 4.53 - ------------------------------------------------------------- 15 7.10 30 4.45 - -------------------------------------------------------------
Form 1197 (VUL) Page 30 SETTLEMENT OPTION TABLE II
- ------------------------------------------------------------------------------------------------------------------------------------ (Per $1,000 of Net Proceeds) - ------------------------------------------------------------------------------------------------------------------------------------ Age of Payee Nearest Age of Payee Nearest Birthday When First Birthday When First Installment is Payable Monthly Installment Installment is Payable Monthly Installment - ------------------------------------------------------------------------------------------------------------------------------------ 5 Years 10 Years 15 Years 20 Years 5 Years 10 Years 15 Years 20 Years Male Female Certain Certain Certain Certain Male Female Certain Certain Certain Certain - ------------------------------------------------------------------------------------------------------------------------------------ 15 20 3.31 3.31 3.31 3.31 33 38 3.77 3.77 3.75 3.74 - ------------------------------------------------------------------------------------------------------------------------------------ 16 21 3.33 3.33 3.33 3.32 34 39 3.80 3.80 3.79 3.77 - ------------------------------------------------------------------------------------------------------------------------------------ 17 22 3.35 3.35 3.34 3.34 35 40 3.84 3.84 3.83 3.81 - ------------------------------------------------------------------------------------------------------------------------------------ 18 23 3.37 3.37 3.36 3.36 36 41 3.88 3.88 3.87 3.84 - ------------------------------------------------------------------------------------------------------------------------------------ 19 24 3.39 3.38 3.38 3.38 37 42 3.93 3.93 3.91 3.88 - ------------------------------------------------------------------------------------------------------------------------------------ 20 25 3.41 3.40 3.40 3.40 38 43 3.97 3.97 3.95 3.92 - ------------------------------------------------------------------------------------------------------------------------------------ 21 26 3.43 3.43 3.42 3.42 39 44 4.02 4.02 4.00 3.96 - ------------------------------------------------------------------------------------------------------------------------------------ 22 27 3.45 3.45 3.44 3.44 40 45 4.07 4.07 4.05 4.00 - ------------------------------------------------------------------------------------------------------------------------------------ 23 28 3.47 3.47 3.47 3.46 41 46 4.13 4.13 4.09 4.05 - ------------------------------------------------------------------------------------------------------------------------------------ 24 29 3.50 3.49 3.49 3.48 42 47 4.18 4.18 4.14 4.09 - ------------------------------------------------------------------------------------------------------------------------------------ 25 30 3.52 3.52 3.57 3.51 43 48 4.24 4.24 4.20 4.14 - ------------------------------------------------------------------------------------------------------------------------------------ 26 31 3.55 3.54 3.54 3.53 44 49 4.30 4.30 4.25 4.18 - ------------------------------------------------------------------------------------------------------------------------------------ 27 32 3.58 3.57 3.57 3.56 45 50 4.36 4.36 4.31 4.23 - ------------------------------------------------------------------------------------------------------------------------------------ 28 33 3.60 3.60 3.59 3.58 46 51 4.43 4.43 4.37 4.28 - ------------------------------------------------------------------------------------------------------------------------------------ 29 34 3.64 3.63 3.60 3.61 47 52 4.49 4.49 4.43 4.34 - ------------------------------------------------------------------------------------------------------------------------------------ 30 35 3.67 3.66 3.65 3.64 48 53 4.56 4.56 4.49 4.39 - ------------------------------------------------------------------------------------------------------------------------------------ 31 36 3.70 3.70 3.69 3.67 49 54 4.64 4.64 4.55 4.44 - ------------------------------------------------------------------------------------------------------------------------------------ 32 37 3.74 3.73 3.72 3.70 50 55 4.77 4.71 4.62 4.50 - ------------------------------------------------------------------------------------------------------------------------------------
Form 1197 (VUL) Page 31 SETTLEMENT OPTION TABLE II (Continued)
- ------------------------------------------------------------------------------------------------------------------------------------ (Per $1,000 of Net Proceeds) - ------------------------------------------------------------------------------------------------------------------------------------ Age of Payee Nearest Age of Payee Nearest Birthday When First Birthday When First Installment is Payable Monthly Installment Installment is Payable Monthly Installment - ------------------------------------------------------------------------------------------------------------------------------------ 5 Years 10 Years 15 Years 20 Years 5 Years 10 Years 15 Years 20 Years Male Female Certain Certain Certain Certain Male Female Certain Certain Certain Certain - ------------------------------------------------------------------------------------------------------------------------------------ 51 56 4.85 4.79 4.69 4.55 69 74 7.52 7.00 6.29 5.56 - ------------------------------------------------------------------------------------------------------------------------------------ 52 57 4.94 4.87 4.76 4.61 70 75 7.77 7.17 6.38 5.60 - ------------------------------------------------------------------------------------------------------------------------------------ 53 58 5.04 4.96 4.84 4.67 71 76 8.04 7.35 6.47 5.63 - ------------------------------------------------------------------------------------------------------------------------------------ 54 59 5.14 5.05 4.91 4.73 72 77 8.32 7.53 6.55 5.66 - ------------------------------------------------------------------------------------------------------------------------------------ 55 60 5.24 5.14 4.99 4.79 73 78 8.62 7.71 6.63 5.68 - ------------------------------------------------------------------------------------------------------------------------------------ 56 61 5.35 5.24 5.07 4.85 74 79 8.94 7.89 6.71 5.70 - ------------------------------------------------------------------------------------------------------------------------------------ 57 62 5.47 5.34 5.15 4.91 75 80 9.28 8.07 6.78 5.72 - ------------------------------------------------------------------------------------------------------------------------------------ 58 63 5.59 5.45 5.24 4.97 76 81 9.63 8.25 6.84 5.73 - ------------------------------------------------------------------------------------------------------------------------------------ 59 64 5.71 5.56 5.33 5.03 77 82 10.00 8.43 6.89 5.74 - ------------------------------------------------------------------------------------------------------------------------------------ 60 65 5.85 5.68 5.42 5.10 78 83 10.39 8.60 6.94 5.74 - ------------------------------------------------------------------------------------------------------------------------------------ 61 66 5.99 5.80 5.51 5.16 79 84 10.80 8.77 6.98 5.75 - ------------------------------------------------------------------------------------------------------------------------------------ 62 67 6.15 5.93 5.61 5.21 80 85 11.22 8.93 7.01 5.75 - ------------------------------------------------------------------------------------------------------------------------------------ 63 68 6.31 6.07 5.70 5.27 81 11.66 9.08 7.04 5.75 - ------------------------------------------------------------------------------------------------------------------------------------ 64 69 6.48 6.21 5.80 5.33 82 12.12 9.21 7.06 5.75 - ------------------------------------------------------------------------------------------------------------------------------------ 65 70 6.66 6.35 5.90 5.38 83 12.60 9.34 7.07 5.75 - ------------------------------------------------------------------------------------------------------------------------------------ 66 71 6.86 6.50 6.00 5.43 84 13.09 9.44 7.08 5.75 - ------------------------------------------------------------------------------------------------------------------------------------ 67 72 7.07 6.66 6.10 5.48 85 13.59 9.54 7.09 5.75 - ------------------------------------------------------------------------------------------------------------------------------------ 68 73 7.29 6.83 6.19 5.52 - ------------------------------------------------------------------------------------------------------------------------------------
Form 1197 (VUL) Page 32 FAIL-SAFE ENDORSEMENT UNDER THE 7-PAY TEST (USING PREMIUM BACK-OUT ONLY THROUGH 60-DAY PERIOD) I. GENERAL This endorsement is intended to confirm your intent at issue to keep the Policy to which it is attached from being treated as a "modified endowment contract" for Federal tax purposes, so long as this endorsement remains in effect. To that end the provisions of the Policy (including this endorsement and any other rider or endorsement) shall be interpreted to prevent the Policy from being subject to such treatment, notwithstanding any other provision to the contrary, so long as this endorsement remains in effect. We reserve the right to amend the Policy to reflect any clarifications that may be needed or are appropriate, including any rider, to achieve this objective. II. REFUND OF EXCESS PREMIUM If at any time the premiums or other amounts paid under the Policy exceed the limit for avoiding such treatment, we have the right to remove such excess amount from the Policy as of the date of its payment (together with interest), and make any appropriate adjustments in the Policy's values and death benefit as of such date. We have the right to refund so long as this excess amount (and interest) is refunded to the policy owner no later than 60 days after the end of the applicable policy year. Prior to being refunded, any such excess amount (and interest) shall be applied to repay any outstanding loan balance under the Policy. III. DEATH BENEFIT ADJUSTMENT If this excess amount (and interest) is not refunded by the end of the 60- day period, the death benefit under the Policy, including any rider, shall be increased retroactively and prospectively to the minimum extent necessary so that at no time is this death benefit ever less than the amount needed to avoid such treatment as a modified endowment contract. To the extent that the death benefit as of any time is increased by the provisions of this endorsement, appropriate adjustments shall be made in the cost of insurance as of that time, that are consistent with such an increase, and such adjustments may be deducted from any death benefits payable. E-2000-10/95 IV. TERMINATION This endorsement shall terminate at the policy owner's election at any time. After termination, we will not refund any excess premium or adjust the death benefit or keep in effect any death benefit adjustment under this endorsement. SECURITY LIFE OF DENVER INSURANCE COMPANY /s/ Eugene L. Copeland SECRETARY E-2000-10/95 THIS POLICY IS A FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY DEATH BENEFITS AND OTHER VALUES PROVIDED BY THIS CONTRACT, WHEN BASED ON THE INVESTMENT EXPERIENCE OF A SEPARATE ACCOUNT, ARE VARIABLE. THESE VALUES MAY INCREASE OR DECREASE BASED ON INVESTMENT EXPERIENCE AND ARE NOT GUARANTEED AS TO FIXED DOLLAR AMOUNT. DEATH BENEFITS ARE PAYABLE BY US UPON THE DEATH OF THE INSURED PRIOR TO THE MATURITY DATE. YOUR NET ACCOUNT VALUE, IF ANY, IS PAYABLE BY US IF THE INSURED IS LIVING AS OF THE MATURITY DATE. FLEXIBLE PREMIUMS ARE PAYABLE BY YOU DURING THE LIFETIME OF THE INSURED UNTIL THE MATURITY DATE. SECURITY LIFE OF DENVER INSURANCE COMPANY A Stock Company CUSTOMER SERVICE CENTER [P.O. BOX 173763, Denver, Colorado 80217-3763 Toll Free Number: 1(800)933-5858] Form 1197 (VUL) -5/97 EX-1.A(5)(A)(I) 4 EXHIBIT 1.A(5) (A) (I) EXHIBIT 1.A (5)(a)(i) SECURITY LIFE OF DENVER INSURANCE COMPANY INSURED: JOHN DOE POLICY DATE: MAY 27, 1997 POLICY NUMBER: 60000001 STATED DEATH BENEFIT: $100,000.00 WE AGREE TO PAY the base death benefit to the Beneficiary upon the death of the Insured while this Policy is in force. WE AGREE TO PAY your Net Account Value to you as of the Maturity Date if the Insured is living on that date. WE ALSO AGREE to provide the other rights and benefits of the Policy. These agreements are subject to the provisions of the Policy. RIGHT TO EXAMINE POLICY PERIOD. You have the right to examine and return this Policy within 45 days of the date the application was signed or within 10 days of receipt of the policy by the policyholder, whichever is later. The Policy may be returned by delivering or mailing it to us at our Customer Service Center. Immediately upon return it will be deemed void as of the Policy Date. Upon return of the Policy to us, we will refund all premiums paid. /s/ Eugene L. Copeland /s/ Stephen M. Christopher Secretary President In this Policy "you" and "your" refer to the Owner of the Policy. "We", "us" and "our" refer to Security Life of Denver Insurance Company. THIS POLICY IS A FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY. THIS IS A NON-PARTICIPATING POLICY DEATH BENEFITS AND OTHER VALUES PROVIDED BY THIS CONTRACT, WHEN BASED ON THE INVESTMENT EXPERIENCE OF A SEPARATE ACCOUNT, ARE VARIABLE. THESE VALUES MAY INCREASE OR DECREASE BASED ON INVESTMENT EXPERIENCE AND ARE NOT GUARANTEED AS TO FIXED DOLLAR AMOUNT. DEATH BENEFITS ARE PAYABLE BY US UPON THE DEATH OF THE INSURED PRIOR TO THE MATURITY DATE. YOUR NET ACCOUNT VALUE, IF ANY, IS PAYABLE BY US IF THE INSURED IS LIVING AS OF THE MATURITY DATE. HOWEVER, AT NO TIME WILL THE MAXIMUM AMOUNT YOU MAY BORROW BE LESS THAN 90% OF THE ACCOUNT VALUE; MINUS ANY OUTSTANDING POLICY LOAN AND ACCRUED BUT UNPAID INTEREST. FLEXIBLE PREMIUMS ARE PAYABLE BY YOU DURING THE LIFETIME OF THE INSURED UNTIL THE MATURITY DATE. THE DEATH BENEFIT WILL BE AT LEAST EQUAL TO THE STATED DEATH BENEFIT AMOUNT AT THE DATE OF ISSUE IF PREMIUMS ARE DULY PAID AND IF THERE ARE NO OUTSTANDING POLICY LOANS, PARTIAL WITHDRAWALS, OR PARTIAL SURRENDERS. REFER TO THE PAYOUT OF PROCEEDS PROVISION FOR ADDITIONAL INFORMATION. SECURITY LIFE OF DENVER INSURANCE COMPANY A Stock Company Customer Service Center P.O. Box 173763, Denver, Colorado 80217-3763 Toll Free Number: 1(800)933-5858 Form 1197 (VUL) - MD - 5/97 TABLE OF CONTENTS SCHEDULE.......................................................................5 DEFINITION OF TERMS............................................................6 INSURANCE COVERAGE PROVISIONS..................................................7 INITIAL PREMIUM ALLOCATION................................................7 VALUATION DATE............................................................7 VALUATION PERIOD..........................................................7 EFFECTIVE DATE OF COVERAGE................................................7 PAYOUT OF PROCEEDS........................................................8 BASE DEATH BENEFIT........................................................8 CHANGE IN REQUESTED INSURANCE COVERAGE....................................9 Requested Increases in Coverage.........................................9 Requested Decreases in Coverage.........................................9 Death Benefit Option Changes...........................................10 PREMIUM PROVISIONS............................................................10 SCHEDULED PREMIUMS.......................................................10 UNSCHEDULED PREMIUMS.....................................................11 PREMIUM LIMITATION.......................................................11 PREMIUM ALLOCATION.......................................................11 VARIABLE ACCOUNT PROVISION....................................................11 THE VARIABLE ACCOUNT.....................................................11 VARIABLE ACCOUNT DIVISIONS...............................................12 CHANGES WITHIN THE VARIABLE ACCOUNT......................................12 GENERAL ACCOUNT PROVISIONS....................................................13 THE GENERAL ACCOUNT......................................................13 GUARANTEED INTEREST DIVISION.............................................13 LOAN DIVISION............................................................13 TRANSFER PROVISIONS...........................................................13 TRANSFERS TO OR FROM THE GUARANTEED INTEREST DIVISION....................13 EXCESS TRANSFER CHARGE...................................................14
Form 1197 (VUL) Page 2 DOLLAR COST AVERAGING....................................................14 AUTOMATIC REBALANCING....................................................15 ACCOUNT VALUE PROVISIONS......................................................15 NET PREMIUM..............................................................16 ACCOUNT VALUES ON THE INVESTMENT DATE....................................16 ACCUMULATION UNIT VALUE..................................................16 ACCUMULATION EXPERIENCE FACTOR...........................................16 ACCOUNT VALUE OF THE DIVISIONS OF THE VARIABLE ACCOUNT...................17 ACCOUNT VALUE OF THE GUARANTEED INTEREST DIVISION........................17 ACCOUNT VALUE OF THE LOAN DIVISION.......................................17 MONTHLY DEDUCTION AND REFUND..................................................18 MONTHLY DEDUCTION........................................................18 COST OF INSURANCE........................................................18 PERSISTENCY REFUND.......................................................19 LOAN PROVISIONS...............................................................19 POLICY LOANS.............................................................19 LOAN INTEREST............................................................19 LOAN DIVISION............................................................19 PARTIAL WITHDRAWAL PROVISIONS.................................................20 SURRENDER PROVISIONS..........................................................21 SURRENDER VALUE..........................................................21 SURRENDER CHARGES........................................................21 BASIS OF COMPUTATIONS....................................................22 FULL SURRENDERS..........................................................22 GRACE PERIOD, TERMINATION AND REINSTATEMENT PROVISIONS........................22 GRACE PERIOD.............................................................22 THREE YEAR CONTINUATION PERIOD...........................................23 TERMINATION..............................................................23 REINSTATEMENT............................................................23 DEFERRAL OF PAYMENT......................................................24
Form 1197 (VUL) - MD Page 3 GENERAL POLICY PROVISIONS.....................................................24 THE POLICY...............................................................24 AGE......................................................................24 PROCEDURES...............................................................24 OWNERSHIP................................................................25 BENEFICIARIES............................................................25 EXCHANGE RIGHT...........................................................25 CONTRACT CHANGES.........................................................26 COLLATERAL ASSIGNMENT....................................................26 INCONTESTABILITY.........................................................26 MISSTATEMENT OF AGE OR SEX...............................................26 SUICIDE EXCLUSION........................................................26 PERIODIC REPORTS.........................................................26 ILLUSTRATION OF BENEFITS AND VALUES......................................27 NONPARTICIPATING.........................................................27 CUSTOMER SERVICE CENTER..................................................27 PAYOUTS OTHER THAN AS ONE SUM.................................................27 ELECTION.................................................................27 PAYOUT OPTIONS...........................................................27 CHANGE AND WITHDRAWAL....................................................28 EXCESS INTEREST..........................................................28 MINIMUM AMOUNTS..........................................................28 SUPPLEMENTARY POLICY.....................................................28 INCOME PROTECTION........................................................29 DEATH OF PRIMARY PAYEE...................................................29 PAYMENTS OTHER THAN MONTHLY..............................................29 SETTLEMENT OPTION TABLES......................................................30
Additional benefits or riders, if any, will be listed in the Schedule. The additional provisions will be inserted in the Policy. FORM 1197 (VUL) - MD PAGE 4 SCHEDULE (Effective Date: July 2, 1997) POLICY INFORMATION Policy Number 1000540-001 Stated Death Benefit $100,000.00 Insured JOHN DOE Minimum Stated Death Benefit $ 50,000.00 Owner JOHN DOE Three Year Continuation Period May 1,1998 Ending Date Death Benefit Option Stated Death Benefit Option 1 Three Year Continuation Period Age And Sex 35, Male Minimum Annual Premium $631.62 Premium Class Standard, Non-Smoker Policy Date May 1, 1997 Scheduled Premium $3,000.00 Maturity Date May 15, 2060 Definition of Life Insurance Test: Guideline Premium
CUSTOMER SERVICE CENTER: P.O. Box 173763, Denver, Colorado 80217-3763 Coverage may expire prior to the Maturity Date if Scheduled Premiums are paid in a timely manner, coverage may expire prior to the Maturity Date if said premiums are insufficient to continue coverage and the Three Year Continuation has ended. Coverage will also be affected by Partial Withdrawals, Policy Loans, changes in the current cost of insurance rates, the actual credited interest rate for the Guaranteed Interest Division and the investment experience of the Variable Account. FORM 1197 (VUL) - MD PAGE 5 SCHEDULE (CONTINUED) BENEFIT PROFILE
- ------------------------------------------------------------------------------------------------------------------------------------ Initial Segment Guideline Benefit Issue Age At Effective Annual Target Description Amount Age Maturity Date Date Premium Premium - ------------------------------------------------------------------------------------------------------------------------------------ Stated Death Benefit (Segment #1) $100,000.00 35 100 May 1, 1995 $1,288.02 $800.00 - ------------------------------------------------------------------------------------------------------------------------------------ Adjustable Term Insurance Rider (Segment #1) $50,000.00 35 100 May 1, 1995 $615,62 $0.00 - ------------------------------------------------------------------------------------------------------------------------------------
A coverage segment is a block of Death Benefit coverage. The Stated Death Benefit shown on the schedule page at issue is the initial coverage segment. Additional segments are added to the policy after issue to increase the Death Benefit. Each individual coverage segment added to the policy has its own cost of insurance charges and expense loads as shown in the Schedule. FORM 1197 (VUL) - MD PAGE 5A SCHEDULE (CONTINUED) ALLOCATION OF INITIAL PREMIUM AS SHOWN ON APPLICATION
[Neuberger & Berman Limited Maturity Bond] 0 % [Neuberger & Berman Growth ] 0 % [Neuberger & Berman Government Income ] 25 % [Neuberger & Berman Partners] 25 % [Alger American Growth Division] 0 % [Alger American Leveraged AllCap Division] 25 % [Alger American MidCap Growth ] 0 % [Alger American Small Capital] 0 % [Fidelity Asset Manager ] 0 % [Fidelity Growth ] 25 % [Fidelity Overseas ] 0 % [Fidelity Money Market ] 0 % [Fidelity Index 500 ] 0 % [INVESCO Total Return ] 0 % [INVESCO Industrial Income ] 0 % [INVESCO High Yield ] 0 % [INVESCO Utilities ] 0 % [Van Eck Worldwide Balanced ] 0 % [Van Eck Gold and Natural Resources ] 0 % Guaranteed Interest Division 0 %
If you elect to invest in a particular Division, at least 1% of your Net Premium must be allocated to that Division provided that the allocation to each Division selected is at least $100. All percentage allocations must be in whole numbers. FORM 1197 (VUL) PAGE 5B SCHEDULE (CONTINUED) EXPENSE CHARGES PREMIUM EXPENSE CHARGES (As a Percent of all Premiums): Sales Load: Segment Issue Age Sales Load 0-49 2.25% 50-59 3.25% 60+ 4.25% State And Local Taxes: 2.5% Federal Deferred Acquisition Cost Charge: 1.5% MONTHLY EXPENSE CHARGES: $13.00 per Policy month for the first 36 months $3.00 per Policy month thereafter; plus $0.0125 per thousand of Stated Death Benefit (or Target Death Benefit, if greater), all years. The per thousand charge is limited to $15.00 per Policy month. ANNUAL MORTALITY AND EXPENSE RISK CHARGE (Based on the percentage of assets in each Variable Account Division) Mortality And Expense Risk Charge: 0.75% FORM 1197 (VUL) - MD PAGE 5C SCHEDULE (CONTINUED) SURRENDER CHARGES The maximum Surrender Charges which pertain to the insurance coverages shown in the Schedule are shown in the following table. The total Surrender Charge equals the sum of the Administration Charges and Sales Surrender Charges as described in the Surrender Charges provision. The total Surrender Charge would not exceed the total Maximum Surrender Charge as outlined below.
---------------------------------------- SURRENDERS DURING THE POLICY YEAR TOTAL MAXIMUM ENDING SURRENDER CHARGE ---------------------------------------- 1996 $650.00 ---------------------------------------- 1997 $650.00 ---------------------------------------- 1998 $650.00 ---------------------------------------- 1999 $650.00 ---------------------------------------- 2000 $650.00 ---------------------------------------- 2001 $650.00 ---------------------------------------- 2002 $650.00 ---------------------------------------- 2003 $568.75 ---------------------------------------- 2004 $487.50 ---------------------------------------- 2005 $406.25 ---------------------------------------- 2006 $325.00 ---------------------------------------- 2007 $243.75 ---------------------------------------- 2008 $162.50 ---------------------------------------- 2009 $81.25 ---------------------------------------- 2010 0 ----------------------------------------
SALES SURRENDER CHARGE TABLE
- -------------------------------------------------------- PERCENTAGE OF - PREMIUMS PAID IN PERCENTAGE OF PERCENTAGE OF EXCESS OF THE PREMIUMS PAID PREMIUMS PAID TARGET PREMIUM IN EXCESS OF 6 UP TO THE AND UP TO 6 TIMES TIMES THE TARGET THE TARGET TARGET PREMIUM PREMIUM PREMIUM - -------------------------------------------------------- 25% 5% 0% - --------------------------------------------------------
ADMINISTRATION SURRENDER CHARGE TABLE
- -------------------------------------------------------------- ADMINISTRATIVE SURRENDER SEGMENT CHARGE PER THOUSAND OF ISSUE AGE STATED DEATH BENEFIT - -------------------------------------------------------------- 0-39 $2.50 - -------------------------------------------------------------- 40-49 $3.50 - -------------------------------------------------------------- 50-59 $4.50 - -------------------------------------------------------------- 60-69 $5.50 - -------------------------------------------------------------- 70 and above $6.50 - --------------------------------------------------------------
The Surrender Charge consists of the Sales Surrender Charge and the Administrative Surrender Charge as determined from the above tables for the first 7 Policy years of each segment. Thereafter, the Surrender Charge for the segment decreases at the beginning of each year from the Effective Date of the segment by 12.5% of the Surrender Charge in effect at the end of the 7th Policy year until it reaches zero at the beginning of the 15th Policy year following the segment's Effective Date or the Policy year the Insured reaches age 98, whichever is sooner. FORM 1197 (VUL) - MD PAGE 5D SCHEDULE (CONTINUED) POLICYHOLDER TRANSACTION CHARGES Requests for Illustrations of Benefits and Values: $25 Premium Allocation Changes: $25 for each change over 5 per Policy year Excess Transfer Charge: See the Transfer Provisions section Partial Withdrawal Service Fee: See below POLICY LOANS Policy Loan Interest Rate: 3.75% per year Guaranteed Interest Rate Credited to Loan Division: 3.00% per year Minimum Loan Amount: $100 Maximum Loan Amount: Refer to the Loan Provisions Section PARTIAL WITHDRAWALS Minimum Partial Withdrawal Amount: $100 Maximum Partial Withdrawal Amount: Amount which will leave $500 as the net Cash Value Partial Withdrawal Service Fee: The lesser of $25 or 2% of the amount withdrawn Limit on Partial Withdrawals: One per Policy year GUARANTEED INTEREST DIVISION Guaranteed Interest Rate For Guaranteed Interest Division: 3.00% per year FORM 1197 (VUL) - MD PAGE 5E SCHEDULE (CONTINUED) DEFINITION OF LIFE INSURANCE
------------------------------------------------------------------------- ATTAINED FACTOR ATTAINED FACTOR ATTAINED FACTOR ATTAINED FACTOR AGE AGE AGE AGE ------------------------------------------------------------------------- 0-40 2.50 ------------------------------------------------------------------------- ------------------------------------------------------------------------- 41 2.43 56 1.46 71 1.13 86 1.05 ------------------------------------------------------------------------- 42 2.36 57 1.42 72 1.11 87 1.05 ------------------------------------------------------------------------- 43 2.29 58 1.38 73 1.09 88 1.05 ------------------------------------------------------------------------- 44 2.22 59 1.34 74 1.07 89 1.05 ------------------------------------------------------------------------- 45 2.15 ------------------------------------------------------------------------- 60 1.30 75 1.05 90 1.05 ------------------------------------------------------------------------- 46 2.09 61 1.28 76 1.05 91 1.04 ------------------------------------------------------------------------- 47 2.03 62 1.26 77 1.05 92 1.03 ------------------------------------------------------------------------- 48 1.97 63 1.24 78 1.05 93 1.02 ------------------------------------------------------------------------- 49 1.91 64 1.22 79 1.05 94 1.01 ------------------------------------------------------------------------- 50 1.85 ------------------------------------------------------------------------- 65 1.20 80 1.05 95 1.01 ------------------------------------------------------------------------- 51 1.78 66 1.19 81 1.05 96 1.01 ------------------------------------------------------------------------- 52 1.71 67 1.18 82 1.05 97 1.01 ------------------------------------------------------------------------- 53 1.64 68 1.17 83 1.05 98 1.01 ------------------------------------------------------------------------- 54 1.57 69 1.16 84 1.05 99 1.01 ------------------------------------------------------------------------- 55 1.50 70 1.15 85 1.05 100 1.00 ------------------------------------------------------------------------- -------------------------------------------------------------------------
The Base Death Benefit at any time will be at least equal to your Account Value multiplied by the appropriate factor from this table. Form 1197 (VUL) - MD Page 5F SCHEDULE (CONTINUED) TARGET DEATH BENEFIT SCHEDULE--TABLE OF TARGET DEATH BENEFITS
- ------------------------------------------------------------------------------------------------------------- POLICY TARGET DEATH GUARANTEED POLICY TARGET DEATH GUARANTEED POLICY TARGET DEATH GUARANTEED YEAR BENEFIT RATES YEAR BENEFIT RATES YEAR BENEFIT RATES - ------------------------------------------------------------------------------------------------------------- 1 $150,000.00 0.14803 25 $150,000.00 0.95583 49 $150,000.00 10.31583 2 $150,000.00 0.14750 26 $150,000.00 1.05333 50 $150,000.00 11.34250 3 $150,000.00 0.15667 27 $150,000.00 1.16167 51 $150,000.00 12.43333 4 $150,000.00 0.16667 28 $150,000.00 1.28500 52 $150,000.00 13.56667 5 $150,000.00 0.17833 29 $150,000.00 1.42583 53 $150,000.00 14.73250 - ------------------------------------------------------------------------------------------------------------- 6 $150,000.00 0.19083 30 $150,000.00 1.58500 54 $150,000.00 15.90750 7 $150,000.00 0.20583 31 $150,000.00 1.76083 55 $150,000.00 17.10750 8 $150,000.00 0.22083 32 $150,000.00 1.95000 56 $150,000.00 18.34917 9 $150,000.00 0.23833 33 $150,000.00 2.15500 57 $150,000.00 19.65333 10 $150,000.00 0.25583 34 $150,000.00 2.37500 58 $150,000.00 21.06250 - ------------------------------------------------------------------------------------------------------------- 11 $150,000.00 0.27667 35 $150,000.00 2.61500 59 $150,000.00 22.63583 12 $150,000.00 0.29917 36 $150,000.00 2.88583 60 $150,000.00 24.63750 13 $150,000.00 0.32333 37 $150,000.00 3.24250 61 $150,000.00 27.49667 14 $150,000.00 0.34917 38 $150,000.00 3.54667 62 $150,000.00 32.04583 15 $150,000.00 0.37833 39 $150,000.00 3.95333 63 $150,000.00 40.01667 - ------------------------------------------------------------------------------------------------------------- 16 $150,000.00 0.40917 40 $150,000.00 4.41000 64 $150,000.00 54.83167 17 $150,000.00 0.44583 41 $150,000.00 4.90000 65 $150,000.00 83.33333 18 $150,000.00 0.48833 42 $150,000.00 5.42167 19 $150,000.00 0.53583 43 $150,000.00 5.97000 20 $150,000.00 0.59083 44 $150,000.00 6.53917 - ------------------------------------------------------------------------------------------------------------- 21 $150,000.00 0.65167 45 $150,000.00 7.14333 22 $150,000.00 0.71917 46 $150,000.00 7.80583 23 $150,000.00 0.79083 47 $150,000.00 8.54333 24 $150,000.00 0.86833 48 $150,000.00 9.37667 - -------------------------------------------------------------------------------------------------------------
The Adjustable Term Insurance Rider Death Benefit is the difference between the Target Death Benefit and the Base Death Benefit provided by the Policy. In no event will the Adjustable Term Insurance Rider Death Benefit be less than zero. Refer to your Adjustable Term Insurance Rider for more information. The guaranteed rates shown FOR THE ADJUSTABLE TERM INSURANCE RIDER are for a standard rate class. If the Adjustable Term Rider is based on a substandard rate class (other than non-smoker or smoker), the guaranteed rates will be adjusted using the rating factor shown in the Schedule for the substandard class. If the substandard rate class is a stated percentage increase, the guaranteed rates will be determined by multiplying the rates for a standard rate class shown above by the rating factor shown in the Schedule. If the substandard rate class is a flat amount per $1,000, the guaranteed rates will be determined by adding the flat amount per $1,000 shown in the Schedule to the rate per $1,000 for the standard rate class shown above. The rates shown above are based on the 1980 Commissioners' Standard Ordinary Mortality Non-smoker Table, age nearest birthday. Form 1197 (VUL) -MD Page 5G SCHEDULE (CONTINUED) TABLE OF GUARANTEED RATES Guaranteed Maximum Cost of Insurance Rates Per $1000 (Basic Policy and Additional Insured Rider if any)
- ------------------------------------------------------------------------------------------------------------------------------- Age Monthly Cost of Age Monthly Cost of Age Monthly Cost of Age Monthly Cost of Nearest Insurance Rate Nearest Insurance Rate Nearest Insurance Rate Nearest Insurance Rate Birthday Birthday Birthday Birthday - ------------------------------------------------------------------------------------------------------------------------------- 0 0.34900 26 0.12342 51 0.44693 76 5.59039 - ------------------------------------------------------------------------------------------------------------------------------- 1 0.08921 27 0.12175 52 0.48965 77 6.17549 - ------------------------------------------------------------------------------------------------------------------------------- 2 0.08254 28 0.12008 53 0.53742 78 6.78686 - ------------------------------------------------------------------------------------------------------------------------------- 3 0.08170 29 0.12208 54 0.59276 79 7.44038 - ------------------------------------------------------------------------------------------------------------------------------- 4 0.07920 30 0.12008 55 0.65401 80 8.16249 - ------------------------------------------------------------------------------------------------------------------------------- 5 0.07503 31 0.12258 56 0.72203 81 8.97320 - ------------------------------------------------------------------------------------------------------------------------------- 6 0.07169 32 0.12509 57 0.79429 82 9.89813 - ------------------------------------------------------------------------------------------------------------------------------- 7 0.06869 33 0.12926 58 0.87251 83 10.95204 - ------------------------------------------------------------------------------------------------------------------------------- 8 0.06338 34 0.13427 59 0.96090 84 12.11846 - ------------------------------------------------------------------------------------------------------------------------------- 9 0.06169 35 0.14094 60 1.05949 85 13.37460 - ------------------------------------------------------------------------------------------------------------------------------- 10 0.06085 36 0.14762 61 1.16916 86 14.69860 - ------------------------------------------------------------------------------------------------------------------------------- 11 0.06419 37 0.15680 62 1.29417 87 16.08129 - ------------------------------------------------------------------------------------------------------------------------------- 12 0.07086 38 0.16682 63 1.43714 88 17.49682 - ------------------------------------------------------------------------------------------------------------------------------- 13 0.08254 39 0.17851 64 1.59899 89 18.96601 - ------------------------------------------------------------------------------------------------------------------------------- 14 0.09588 40 0.19103 65 1.77812 90 20.51212 - ------------------------------------------------------------------------------------------------------------------------------- 15 0.10756 41 0.20607 66 1.97123 91 22.16549 - ------------------------------------------------------------------------------------------------------------------------------- 16 0.11924 42 0.22110 67 2.18097 92 23.98724 - ------------------------------------------------------------------------------------------------------------------------------- 17 0.12842 43 0.23865 68 2.40660 93 26.06643 - ------------------------------------------------------------------------------------------------------------------------------- 18 0.13343 44 0.25619 69 2.65338 94 28.78427 - ------------------------------------------------------------------------------------------------------------------------------- 19 0.13844 45 0.27709 70 2.93268 95 32.81758 - ------------------------------------------------------------------------------------------------------------------------------- 20 0.14011 46 0.29966 71 3.30181 96 39.64294 - ------------------------------------------------------------------------------------------------------------------------------- 21 0.13927 47 0.32391 72 3.61779 97 53.06605 - ------------------------------------------------------------------------------------------------------------------------------- 22 0.13677 48 0.34984 73 4.04199 98 83.33333 - ------------------------------------------------------------------------------------------------------------------------------- 23 0.13427 49 0.37912 74 4.52073 99 83.33333 - ------------------------------------------------------------------------------------------------------------------------------- 24 0.13093 50 0.41009 75 5.03724 - ------------------------------------------------------------------------------------------------------------------------------- 25 0.12675 - -------------------------------------------------------------------------------------------------------------------------------
The rates shown are for a standard rate class. If the Policy is based on a substandard rate class (other than Smoker or Non-Smoker), the maximum cost of insurance rates will be adjusted using the rating factor shown in the Schedule for the substandard class. If the substandard rate class is a stated percentage increase, the maximum cost of insurance rates will be determined by multiplying the rates for a standard rate class shown above by the rating factor shown in the Schedule. If the substandard rate class is a flat amount per $1,000, the maximum cost of insurance rates will be determined by adding the flat amount per $1,000 shown in the Schedule to the rate per $1,000 for the standard rate class shown above. The rates shown above are based on the 1980 Commissioners' Standard Ordinary Mortality Non-Smoker Table, age nearest birthday. Form 1197 (VUL) -MD Page 5H DEFINITION OF TERMS ACCOUNT VALUE - The sum of the amounts allocated to the Divisions of the Variable Account and to the Guaranteed Interest Division, as well as any amount set aside in the Loan Division to secure a Policy Loan. ACCUMULATION UNIT VALUE - The value of the Accumulation Units of each Division of the Variable Account. The Accumulation Unit Value is determined as of each Valuation Date. BASE DEATH BENEFIT - Initially this is the Stated Death Benefit under the Policy. The Base Death Benefit may be greater than the Stated Death Benefit depending on which death benefit option and which test for the Federal income tax law definition of life insurance you choose. Please refer to the Base Death Benefit section for further information. CASH SURRENDER VALUE - The amount of your Account Value minus the Surrender Charge, if any. CUSTOMER SERVICE CENTER - Our administrative office at P.O. Box 173763, Denver, CO 80217-3763. DIVISION(S) OF THE VARIABLE ACCOUNT - The investment options available, each of which invests in shares of one of the Portfolios. GENERAL ACCOUNT - The account which contains all of our assets other than those held in the Variable Account or our other separate accounts. GUARANTEED INTEREST DIVISION - Part of our General Account to which a portion of the Account Value may be allocated and which provides guarantees of principal and interest. INVESTMENT DATE - The date on which the initial Net Premium we receive will be allocated to your Policy. We will not allocate funds to your Policy until we receive at least one quarter of the Minimum Annual Premium as shown in the Schedule attached to your Policy and we have approved your Policy for issue. LOAN DIVISION - Part of our General Account in which funds are set aside to secure any outstanding Policy Loan and accrued loan interest when due. MATURITY DATE - The date the Policy matures. This is the Policy anniversary nearest the Insured's 100th birthday. MONTHLY PROCESSING DATE - The date each month on which the monthly deductions from the Account Value are due. The first Monthly Processing Date will be the Policy Date or the Investment Date, if later. Subsequent Monthly Processing Dates will be the same date as the Policy Date each month unless this is not a Valuation Date, in which case the Monthly Processing Date occurs on the next Valuation Date. NET ACCOUNT VALUE - The amount of the Account Value minus any Policy Loan and accrued loan interest. NET CASH SURRENDER VALUE - The amount of the Cash Surrender Value minus any Policy Loan and accrued loan interest. NET PREMIUM - Premium amounts paid less the sales and tax charges. These charges are deducted from the premiums before the premium is applied to your Account Value. PARTIAL WITHDRAWAL - The withdrawal of a portion of your Net Cash Surrender Value from the Policy. The Partial Withdrawal may cause you to incur a Surrender Charge, and it may reduce the amount of Stated Death Benefit in force. POLICY LOAN - The sum of amounts you have borrowed from your Policy, increased by any Policy Loan interest capitalized when due, and reduced by any Policy Loan repayments. RIGHT TO EXAMINE POLICY PERIOD - The period of time within which the Owner may examine the Policy and return it for a refund. SCHEDULED PREMIUM - The premium amount which you specify on the application as the amount you intend to pay at fixed intervals over a specified period of time. We will send you premium reminder notices for the amount of the Scheduled Premium on a quarterly, semiannual, or annual basis, as you determine; you need not pay the Scheduled Premium, and you may change it at any time. Also, within limits, you may pay less or more than the Scheduled Premium. STATED DEATH BENEFIT - The initial amount of Base Death Benefit under the Policy. The Stated Death Benefit amount will not vary unless you change it. SURRENDER CHARGE - The charge made against your Account Value in the event of surrender, Policy lapse, requested reductions in the Stated Death Benefit, or certain Partial Withdrawals. The Surrender Charge consists of the administrative Surrender Charge and the sales Surrender Charge. VALUATION PERIOD - The period which begins at 4:00 p.m. Eastern Time on Valuation Date and ends at 4:00 p.m. Eastern Time on the next succeeding Valuation Date. Form 1197 (VUL) - MD Page 6 INSURANCE COVERAGE PROVISIONS INITIAL PREMIUM ALLOCATION We will not allocate funds to your Policy until we receive at least one quarter of the Minimum Annual Premium. The Minimum Annual Premium is listed in the Schedule. The Valuation Date on which we receive this amount and have approved your Policy for issue is the Investment Date. As of the Investment Date, the amount you have asked to be invested in the Divisions of the Variable Account will be allocated to the [Fidelity Investments Money Market Division]. Any amount you have designated for allocation to the Guaranteed Interest Division will be allocated to that Division. The amount allocated to the [Fidelity Investments Money Market Division] will remain there until the end of the Right to Examine Policy Period, at which time the balance will be transferred to the other Divisions of the Variable Account according to the allocations shown in the Schedule. VALUATION DATE A Valuation Date is any day: a) The New York Stock Exchange ("NYSE") is open for trading and on which Security Life's Customer Service Center is open for business; or b) As may be required by law. VALUATION PERIOD A Valuation Period begins at 4 p.m. Eastern time on a Valuation Date and ends at 4 p.m. Eastern time on the next succeeding Valuation Date. All Policy processing for a Valuation Period takes place as of the end of the Valuation Period. EFFECTIVE DATE OF COVERAGE The Policy date shown in the Schedule is the Effective Date for all coverage provided in the original application. The Effective Date is subject to the payment of at least one quarter of the Minimum Annual Premium and the acceptance of the Policy by you during the continued insurability of all persons insured by this Policy and any riders attached. The Policy date is the date from which we measure Policy years and determine the Monthly Processing Date. The first Monthly Processing Date is the Investment Date. Future Monthly Processing Dates are the same calendar day of each month as the Policy date unless this is not a Valuation Date in which case the Monthly Processing Date occurs on the next Valuation Date. A Policy anniversary occurs each year on the same month and day as the Policy date unless this is not a Valuation Date in which case the Policy anniversary occurs on the next Valuation Date. If the Policy date is February 29th, the Policy anniversary will be February 28th in years in which there is not a February 29th. The Effective Date for increases and additional benefits is shown in the Schedule. Form 1197 (VUL) Page 7 PAYOUT OF PROCEEDS The Payout of Proceeds is the amount we will pay: a) as of the Maturity Date, b) upon surrender of the Policy before the Maturity Date, or c) upon the death of the Insured before the Maturity Date. The Payout of Proceeds as of the Maturity Date will be your Net Account Value. The Payout of Proceeds upon surrender of this Policy prior to the Maturity Date will be the net Cash Surrender Value. The Maturity Date is the Policy anniversary on which the Insured's Age is 100. The Insured's Age is the Age listed in the Schedule increased by the number of completed Policy years since the Policy date. The Payout of Proceeds upon the death of the Insured will be the Base Death Benefit; plus any amounts payable from any additional benefits provided by rider; minus any outstanding Policy Loan including accrued but unpaid interest; minus any unpaid monthly deductions incurred prior to the date of death. We will determine the amount of proceeds payable upon the death of the Insured when we have received due proof of death and any other information which is necessary to process the claim. Any proceeds we pay are subject to adjustments as provided in the Misstatement of Age or Sex, Suicide Exclusion and Incontestability provisions. We will pay Proceeds in one sum unless you request an alternate form of payment. There are many possible methods of payment. The available Payout Options are described in the Payouts Other Than As One Sum provision. Contact us or your agent for additional information. Interest will be paid on the one sum death Proceeds from the date of the death to the date of payment, or until a Payout Option is selected. Interest will be at the rate we declare, or at any higher rate required by law. BASE DEATH BENEFIT The total Stated Death Benefit is the sum of the Stated Death Benefit for all coverage segments. The Stated Death Benefit for each coverage segment and the death benefit option are shown in the Schedule. The Base Death Benefit is determined by the death benefit option which you select as follows: Option 1 The Base Death Benefit equals the total Stated Death Benefit. Option 2 The Base Death Benefit equals the total Stated Death Benefit, plus your Account Value. Option 3 The Base Death Benefit equals the total Stated Death Benefit, plus the sum of Premiums paid minus Partial Withdrawals taken. The Base Death Benefit at any time will be at least equal to your Account Value multiplied by the appropriate factor from the Definition of Life Insurance Factors table as shown in the Schedule. This Policy is designed to qualify as a life insurance contract under the Internal Revenue Code. All terms and provisions of the Policy shall be construed in a manner consistent with that design. The amount of insurance in force at any time shall not be less than the amount of insurance necessary to achieve such qualification under the applicable provisions of the Internal Revenue Code in existence at the time the Policy is issued. We reserve the right to amend the Policy or adjust the amount of insurance when required, to maintain this Policy's qualifications as Life Insurance under the Internal Revenue Code. We will send you a copy of any Policy amendment. Form 1197 (VUL) - MD Page 8 CHANGE IN REQUESTED INSURANCE COVERAGE At least 30 days prior to a Policy anniversary, you may request that the insurance coverage be increased or decreased. You may not increase coverage after the Insured is Age 86. You may change the coverage only once each Policy year on the Policy anniversary. The change in coverage may not be for an amount less than $1,000. The Effective Date of the change will be the Policy anniversary next following the date the written application is approved by us. After any change to the Stated Death Benefit, you will receive a new Schedule which will include the Stated Death Benefit, the benefit under any riders, if applicable, the Guaranteed Cost of Insurance rates, the Guideline Annual Premium, and the new Target Premium and the new Surrender Charge. REQUESTED INCREASES IN COVERAGE At least 30 days prior to a Policy anniversary, you may request an increase in the Stated Death Benefit. An increase will become effective as of the Policy anniversary after we have approved your application for increase. You must provide evidence satisfactory to us that the Insured is insurable according to our normal rules of underwriting for this type of Policy. This evidence will include an application and may include required medical information. You will have the right to cancel an increase in the death benefit within the later of: a) 45 days after you sign the application for the increase, b) 20 days after you have received the new Schedule, or c) 10 days after we mail you the Notice of Withdrawal Right. You may cancel an increase by sending notice in a form acceptable to us to our Customer Service Center. During this period, we will allocate the Premiums you pay related to the increase to the [Fidelity Investments Money Market Division] of the Variable Account. At the end of this period, the amount of the Premium remaining in the [Fidelity Investments Money Market Division] will be transferred to the Division of the Variable Account according to your most recent written allocation instruction. If you cancel an increase we will refund to you any charges attributable to the increase. An increase in the Stated Death Benefit will result in a new Sales Load. Premium allocated to an increase in coverage will be subject to a new Sales Load. REQUESTED DECREASES IN COVERAGE At least 30 days prior to a Policy anniversary, you may request a decrease in the Stated Death Benefit. A decrease will be effective as of the Policy anniversary. You may decrease the Stated Death Benefit if the Effective Date of the decrease will occur after the later of 2 years from the Policy date or 2 years after the most recent increase was made. A requested decrease will reduce each of the Stated Death Benefit segments in the same proportion as the total Stated Death Benefit is reduced. A Surrender Charge will apply if the Stated Death Benefit is decreased and the decrease occurs during the 14 years following the Policy date or the date of the prior increase. If a Surrender Charge applies, it will be deducted from your Account Value and future Surrender Charges will be reduced. The sum of the Stated Death Benefit for all coverage segments after any change may not be less than the minimum Stated Death Benefit shown in the Schedule. The Surrender Charge deducted from the Account Value will be equal to the difference between the prior Surrender Charge and the new Surrender Charge based upon the decrease in coverage. Refer to the Surrender Charge provision for the calculation of the amount of Surrender Charge made for a decrease in coverage. Form 1197 (VUL) - MD Page 9 DEATH BENEFIT OPTION CHANGES At least 30 days prior to a Policy anniversary, you may request a change to the death benefit option. This change will be effective as of the Policy anniversary. A death benefit option change applies to the entire Stated Death Benefit. For us to approve a change to the death benefit option from Option 1 to Option 2, or from Option 1 to Option 3, you must submit evidence to us that the Insured is insurable according to our normal rules of underwriting for that class of policy. We will not reduce the Stated Death Benefit below the minimum Stated Death Benefit shown in the Schedule. After the Effective Date of the change, the Stated Death Benefit will be changed according to the following table: OPTION CHANGE FROM TO STATED DEATH BENEFIT FOLLOWING CHANGE EQUALS: Option 1 Option 2 Stated Death Benefit prior to such change minus your Account Value as of the Effective Date of the change. Option 2 Option 1 Stated Death Benefit prior to such change plus your Account Value as of the Effective Date of the change. Option 1 Option 3 Stated Death Benefit prior to such change minus the sum of the Premiums paid minus Partial Withdrawals taken as of the Effective Date of the change. Option 3 Option 1 Stated Death Benefit prior to such change plus the sum of the Premiums paid minus Partial Withdrawals taken as of the Effective Date of the change. Option 2 Option 3 Stated Death Benefit prior to such change plus i) your Account Value as of the Effective Date of the change, minus ii) the sum of the Premiums paid minus Partial Withdrawals taken as of the Effective Date of the change. Option 3 Option 2 Stated Death Benefit prior to such change plus i) the sum of the Premiums paid minus Partial Withdrawals taken as of the Effective Date of the change, minus ii) your Account Value as of the Effective Date of the change. For purposes of death benefit option changes, your Account Value will be allocated to each coverage segment in the same proportion that the Stated Death Benefit of that segment bears to the sum of all Stated Death Benefit segments as of the Effective Date of change. PREMIUM PROVISIONS SCHEDULED PREMIUMS The Scheduled Premium as shown in the Schedule may be paid while this Policy is in force during the Insured's lifetime. You may increase or decrease the amount of the Scheduled Premium, as long as any decrease does not reduce the Scheduled Premium below the monthly deduction and any increase does not exceed the Guideline Annual Premium. Under conditions provided in the Grace Period provision and the Three Year Continuation Period, you may be required to make Premium payments to keep the Policy in force. Form 1197 (VUL) - MD Page 10 We will send reminder notices to you for the Scheduled Premium amount and frequency that you have selected. You may select to receive notices either annually, semiannually or quarterly. You may also arrange for payments of Premiums on a monthly basis through an authorized special payment facility. All payment modes are subject to our minimum requirements for the payment mode selected. UNSCHEDULED PREMIUMS You may make unscheduled Premium payments at any time the Policy is in force during the Insured's lifetime. The unscheduled Premium payment must be at least $100. Unless you tell us otherwise, these Premium payments will first be applied to reduce or pay off any existing Policy Loan and, as such, Premium Expense Charges will not be deducted. We may limit the amount of such unscheduled Premium payments if the payment would result in an increase in the Base Death Benefit caused by the Definition of Life Insurance test used to qualify your Policy as a life insurance policy under the Internal Revenue Code. If the net amount at risk is increased as a result of an unscheduled Premium, we will require evidence of insurability satisfactory to us that the Insured is insurable according to our normal rules of underwriting for this type of Policy. The net amount at risk is the difference between the Base Death Benefit and your Account Value. PREMIUM LIMITATION We will not accept any Premium that causes your Policy not to qualify as a life insurance policy under the Internal Revenue Code. PREMIUM ALLOCATION During the Right to Examine Policy Period, the portion of your Net Premium which you have elected to invest in a Division of the Variable Account will be invested in the [Fidelity Investments Money Market Division]. After the Right to Examine Policy Period, the balance of your funds in the [Fidelity Investments Money Market Division] will be reallocated as you directed in your Premium allocation shown in the Schedule. After the Right to Examine Policy Period, each Net Premium will be allocated to the Divisions of the Variable Account and the Guaranteed Interest Division as you directed in the application or as otherwise requested. You may change the allocation for subsequent Premiums by sending us written notice at our Customer Service Center. If you change your Premium allocation more than 5 times per Policy year, we will deduct a charge from the Divisions of the Variable Account and the Guaranteed Interest Division in the same proportion that your Account Value of each Division bears to your Net Account Value. The amount of this charge is shown in the Schedule. Premium allocation percentages may be in any whole number from 1% to 100% provided that at least $100 is allocated to each Division selected. VARIABLE ACCOUNT PROVISION THE VARIABLE ACCOUNT The Variable Account is an account established by us, pursuant to the laws of the State of Colorado, to separate the assets funding the benefits for the class of policies to which this Policy belongs from the other assets of Security Life of Denver. The Variable Account is registered as a unit investment trust under the Investment Company Act of 1940. All income, gains and losses, whether or not realized, from assets allocated to the Variable Account are credited to or charged against the Variable Account without regard to income, gains or losses of our General Account. The assets of the Variable Account are our property but are separate from our General Account and our other Variable Accounts. That portion of the assets of the Variable Account which is equal to the reserves and other Policy liabilities with respect to the Variable Account is not subject to creditor claims against us. The assets of the Variable Account shall be available to cover the liabilities of the General Account Form 1197 (VUL) - MD Page 11 only to the extent that the assets of the Variable Account exceed the liabilities of the Variable Account under this variable life policy. The assets of the Variable Account shall be valued at least as often as any policy benefits vary, but at least monthly. VARIABLE ACCOUNT DIVISIONS The Variable Account is divided into Divisions, each of which invests in a series fund Portfolio designed to meet the objectives of the Division. The current eligible Divisions are shown in the Schedule. We may, from time to time, add additional Divisions. If we do, you may be permitted to select from these other Divisions subject to the terms and conditions we may impose on those allocations. CHANGES WITHIN THE VARIABLE ACCOUNT When permitted by law, and subject to any required notice to you and approval of the Securities and Exchange Commission ("SEC"), State regulatory authorities or Policy Owners, we may from time to time make the following changes to the Variable Account: . Make additional Divisions available. These Divisions will invest in investment Portfolios we find suitable for the Policy. . Eliminate Divisions from the Variable Account, combine 2 or more Divisions, or substitute a new Portfolio for the Portfolio in which a Division invests. A substitution may become necessary if, in our judgment, a Portfolio no longer suits the purposes of the Policy. This may happen due to a change in laws or regulations, or a change in a Portfolio's investment objectives or restrictions. This may also happen if the Portfolio is no longer available for investment, or for some other reason, such as a declining asset base. . Transfer assets of the Variable Account, which we determine to be associated with the class of Policies to which your Policy belongs, to another Variable Account. . Withdraw the Variable Account from registration or make changes as required under the Investment Company Act of 1940. . Operate the Variable Account as a management investment company under the Investment Company Act of 1940. . Cause one or more Divisions to invest in a mutual fund other than or in addition to the Portfolios. Form 1197 (VUL) - MD Page 12 GENERAL ACCOUNT PROVISIONS THE GENERAL ACCOUNT The General Account holds all of our assets other than those held in the Variable Account or our other separate accounts. The Guaranteed Interest Division is a part of our General Account. GUARANTEED INTEREST DIVISION The Guaranteed Interest Division is another Division to which you may allocate Premiums or make transfers. The Account Value of the Guaranteed Interest Division is equal to the Net Premium allocated to this Division plus any earned interest minus deductions taken from this Division. Interest is credited at the guaranteed rate shown in the schedule or may be credited at a higher rate. Any higher rate is guaranteed to be in effect for at least 12 months. LOAN DIVISION The Loan Division is the account which is set aside to secure the Policy Loan, if any. See the Loan Provision section for information. TRANSFER PROVISIONS After the Right to Examine Policy Period, your Account Value in each Division may be transferred to any other Division of the Variable Account upon written request. Transfers from the Guaranteed Interest Division are subject to the limitations as described in the Transfer To or From The Guaranteed Interest Division provision. The number of free transfers permitted in any one Policy year without an Excess Transfer Charge, the total number of transfers permitted and the Excess Transfer Charge are shown in the table below. Any transfers made due to the operation of the Automatic Rebalancing Feature or Dollar Cost Averaging will not count toward the transfers allowed free of charge. The minimum amount that may be transferred from each Division is the lesser of $100 or the balance of a Division. The following table summarizes the number of transfers available and the associated charges during any Policy year. ----------------------------------------------------------------------- FREE TRANSFERS 12 ----------------------------------------------------------------------- TOTAL NUMBER OF TRANSFERS PERMITTED Unlimited ----------------------------------------------------------------------- EXCESS TRANSFER CHARGE $25 for each transfer in excess of 12 during any Policy year. -----------------------------------------------------------------------
TRANSFERS TO OR FROM THE GUARANTEED INTEREST DIVISION Once during the first 30 days of each Policy year, you may transfer amounts from the Guaranteed Interest Division. Transfer requests received within 30 days prior to the Policy anniversary will be deemed to occur as of the Policy anniversary. Transfer requests received on the Policy anniversary or within the following 30 days will be processed; transfer requests received at any other time will not be processed. Transfers of your Account Value to the Guaranteed Interest Division are not limited to this 30-day period. The maximum transfer amount from the Guaranteed Interest Division in any Policy year is the greatest of: Form 1197 (VUL) - MD Page 13 a) 25% of your Account Value in the Guaranteed Interest Division at the time of the first transfer or withdrawal in a Policy year; b) The minimum transfer amount; or c) The sum of the amounts transferred and withdrawn from the Guaranteed Interest Division in the prior Policy year. For purposes of calculating the maximum transfer from the Guaranteed Interest Division, all Partial Withdrawals and transfers from the Guaranteed Interest Division in a Policy year are summed. EXCESS TRANSFER CHARGE If you exceed the number of free transfers allowed, you will be assessed an Excess Transfer Charge. This charge will be deducted from each of the Divisions in which you are invested in the same proportion that the amount of Account Value in that Division bears to the Net Account Value immediately after the transfer. DOLLAR COST AVERAGING If you have at least $10,000 of Account Value in either the [Fidelity Investments Money Market Division] or the [Neuberger & Berman Limited Maturity Bond Division], you may choose to transfer a specified dollar amount each month from one of these Divisions to other Divisions of the Variable Account. Dollar Cost Averaging transfers may not be made to the Guaranteed Interest Division. The minimum amount that you may elect to transfer each month is $100. The maximum amount that you may transfer is equal to your Account Value in the Division from which the transfer is taken when the election is made, divided by 12. Dollar Cost Averaging may be elected to end on a specified date or when a specific balance remains in the [Fidelity Investments Money Market Division] or the [Neuberger & Berman Limited Maturity Bond Division]. Percentage allocations of the transfer amount must be designated as whole number percentages; no specific dollar designation may be made to the Divisions of the Variable Account. If you elect to transfer to a particular Division, the minimum percentage that may be transferred to that Division is 1% of the total amount transferred provided that the allocation is at least $100. The transfer date will be the same calendar day each month as the Monthly Processing Date. If this calendar day is not a Valuation Date, the next Valuation Date will be used. If, on any transfer date, your Account Value in the chosen Division is equal to or less than the amount you have elected to have transferred, the entire amount will be transferred, and this option will end. Dollar Cost Averaging may not begin until the Monthly Processing Date following the end of the Right to Examine Policy Period. You may change the transfer amount or the Divisions to which transfers are to be made once each Policy year. You may cancel this election by sending us written notice at our Customer Service Center at least 7 days before the next transfer date. Any transfer under this option will not be included for purposes of the Excess Transfer Charge. If you elect both Dollar Cost Averaging and Automatic Rebalancing, Dollar Cost Averaging will occur first. On the first Valuation Date of the next calendar quarter after Dollar Cost Averaging has terminated, Automatic Rebalancing will begin. Form 1197 (VUL) Page 14 AUTOMATIC REBALANCING Automatic Rebalancing allows you to match your Account Value in each Division to your allocation percentage for new Premiums. Automatic Rebalancing can be elected in your application or by completing the Automatic Rebalancing form and returning it to our Customer Service Center. As of the first Valuation Date of each calendar quarter thereafter we will reallocate your Net Account Value so that the amount in each Division matches your Premium allocation. Automatic Rebalancing may not begin until the end of the Right to Examine Policy Period. While this feature is in effect, we require that you allocate no more than 35% of your Premiums to any one Division, and you must allocate your Premiums to at least 5 Divisions. If at any time during the operation of the Automatic Rebalancing feature you request a change in Premium allocation which does not meet these requirements, we will notify you that your allocation must be changed. We will not process such a request unless you also request that the Automatic Rebalancing feature be discontinued. When you request a change in Premium allocation that meets these requirements, your Net Account Value will be reallocated as of the Valuation Date that we receive your written allocation instructions. Amounts will be transferred among the Divisions to match the allocation for new Premiums. During the operation of Automatic Rebalancing, you may not change your allocation percentage to the Guaranteed Interest Division by more than 25% of the percentage previously allocated to the Guaranteed Interest Division. If you change your Premium allocation more than five times per Policy year, there will be a $25 charge taken from your Account Value. This charge will be deducted from each of the Divisions of the Variable Account and the Guaranteed Interest Division in the same proportion that your Account Value of each Division bears to your Net Account Value as of the Valuation Date the allocation change is effective. Any transfer as a result of the operation of Automatic Rebalancing will not be included in determining if the Excess Transfer Charge will apply. You may not transfer among Divisions while the Automatic Rebalancing feature is in effect. If you elect both Dollar Cost Averaging and Automatic Rebalancing, Dollar Cost Averaging will occur first. On the first Valuation Date of the next calendar quarter after Dollar Cost Averaging has terminated, Automatic Rebalancing will begin. ACCOUNT VALUE PROVISIONS The Account Value is the sum of the current amounts allocated to the Divisions of the Divisions of the Variable Account and to the Guaranteed Interest Division plus your balance in the loan Division. The Account Value is based on the amount and number of Premiums paid, Policy and rider charges assessed, loans and withdrawals taken, monthly deductions, Premium Expense Charges, transaction charges, and the investment experience or credited interest of the Division to which your Account Value is allocated. Your Net Account Value is equal to your Account Value minus any Policy Loan and accrued but unpaid loan interest. Form 1197 (VUL) Page 15 NET PREMIUM The Net Premium equals the Premium paid minus the Premium Expense Charges for taxes and the appropriate Sales Load shown in the Schedule. Premiums allocated to an increase in coverage will be subject to a new Sales Load. Premiums are allocated in the same proportion that the Guideline Annual Premium of each segment bears to the sum of the Guideline Annual Premiums of all segments. The Guideline Annual Premium for each coverage segment is shown in the Schedule. ACCOUNT VALUES ON THE INVESTMENT DATE The Account Value of each Division of the Variable Account and the Guaranteed Interest Division as of the Investment Date is equal to: a) The allocation to that Division of the first Net Premium paid (as determined by you); minus b) The portion of any monthly deductions due on the Investment Date allocated to that Division. The Account Value of the Loan Division as of the Investment Date is equal to zero. ACCUMULATION UNIT VALUE The investment experience of a Division of the Variable Account is determined as of each Valuation Date. We use an Accumulation Unit Value to measure the experience of each of the Variable Account Divisions during a Valuation Period. We set the accumulation Unit Value at $10 on the Valuation Date when the first investments in each Division of the Variable Account are made. The Accumulation Unit Value for a Valuation Period equals the Accumulation Unit Value for the preceding Valuation Period multiplied by the Accumulation Experience Factor for the Valuation Period. The number of units for a given transaction related to a Division of the Variable Account as of a Valuation Date is determined by dividing the dollar value of that transaction by that Division's Accumulation Unit Value for that date. ACCUMULATION EXPERIENCE FACTOR For each Division of the Variable Account, the Accumulation Experience Factor reflects the investment experience of the Portfolio in which that Division invests and the charges assessed against that Division for a Valuation Period. The Accumulation Experience Factor is calculated as follows: a) The net asset value of the Portfolio in which that Division invests as of the end of the current Valuation Period; plus b) The amount of any dividend or capital gains distribution declared and reinvested in the Portfolio in which that Division invests during the current Valuation Period; minus c) A charge for taxes, if any. d) The result of (a), (b) and (c) is then divided by the net asset value of the Portfolio in which that Division invests as of the end of the preceding Valuation Period; minus e) The result of (d) minus the daily equivalent of the Annual Mortality and Expense Risk Charge shown in the Schedule for each day in the current Valuation Period. Form 1197 (VUL) - MD Page 16 ACCOUNT VALUE OF THE DIVISIONS OF THE VARIABLE ACCOUNT On subsequent Valuation Dates after the Investment Date, your Account Value of each Division of the Variable Account is calculated as follows: a) The number of Accumulation Units in that Division as of the beginning of the current Valuation Period multiplied by that Division's Accumulation Unit Value for the current Valuation Period; plus b) Any additional Net Premiums allocated to that Division during the current Valuation Period; plus c) Any Account Value transferred to or minus any Account Value transferred from the Variable Division during the current Valuation Period (including the applicable portion of any transfer fee); minus d) Any Partial Withdrawals allocated to that Division and any applicable withdrawal service fees which are allocated to the Variable Division during the current Valuation Period; plus e) Any amounts released from the Loan Division as a result of a loan or loan interest payment, or minus amounts transferred to the Loan Division as of a result of any loans which are allocated to the Variable Division during the current Valuation Period; minus f) The Portion of any Surrender Charge resulting from a decrease in Stated Death Benefit allocated to the Division; minus g) The portion of the monthly deduction allocated to the Variable Division, if a Monthly Processing Date occurs during the current Valuation Period. ACCOUNT VALUE OF THE GUARANTEED INTEREST DIVISION On Valuation Dates after the Investment Date, your Account Value of the Guaranteed Interest Division is calculated as follows: a) The Account Value of the Guaranteed Interest Division at the end of the preceding Valuation Period plus interest at the declared rate credited during the current Valuation Period; plus b) Any additional Net Premiums allocated to the Guaranteed Interest Division plus interest credited to these Premiums during the current Valuation Period; plus c) Any account Value transferred to or minus any Account Value transferred from the Guaranteed Interest Division during the current Valuation Period (including the applicable portion of any transfer fee); minus d) Any Partial Withdrawals taken and any applicable withdrawal service fees which are allocated to the Guaranteed Interest Division during the current Valuation Period; plus e) Any amounts released from the Loan Division as a result of a loan or loan interest payment, or minus amounts transferred to the Loan division as of a result of any loans which are allocated to the Guaranteed Interest Division during the current Valuation Period; minus f) The Portion of any Surrender Charge resulting from a decrease in Stated Death Benefit allocated to the Division; minus g) The portion of the monthly deduction allocated to the Division, if a Monthly Processing Date occurs during the current Valuation Period. ACCOUNT VALUE OF THE LOAN DIVISION On Valuation Dates after the Investment Date, your Account Value of the Loan Division is equal to: a) The Account Value of the Loan Division on the prior Valuation Date; plus b) Any interest credited to the Loan Division during the Valuation Period; plus c) An amount equal to any additional loans since the prior Valuation Date; minus d) Any loan repayments, including payment of loan interest in cash; plus e) The amount of accrued loan interest if the Valuation Date is a Policy anniversary; minus Form 1197 (VUL) Page 17 f) The amount of interest credited to the Loan Division during the year if the Valuation Date is a Policy anniversary. On Policy anniversaries, any amount of interest credited to the Loan Division during the year is transferred from the Loan Division to the Variable Account and Guaranteed Interest Divisions in the same proportion that your Account Value in each Variable Division and the Guaranteed Interest Division bears to your Net Account Value as of the Policy anniversary. MONTHLY DEDUCTION AND REFUND MONTHLY DEDUCTION The monthly deduction is equal to: a) the cost of insurance charges for this Policy; plus b) the monthly charges for any other additional benefits provided by rider; plus c) the monthly expense charges shown in the Schedule. The monthly deductions allocated to the Divisions of the Variable Account and Guaranteed Interest Division in the same proportion that your Account Value in the Division bears to your Net Account Value as of the Monthly Processing Date. This deduction is taken from your Account Value as of the Monthly Processing Date. COST OF INSURANCE The cost of insurance is determined on a monthly basis for each coverage segment. Such cost is the monthly cost of insurance rate for the Insured's Premium Class multiplied by the net amount at risk. The net amount at risk is (a) minus (b) where: a) is the Base Death Benefit for all coverage segments as of the Monthly Processing Date after the monthly deductions (other than cost of insurance charges for the Base Death Benefit, any Adjustable Term Insurance Rider and any Waiver of Monthly Deductions Rider), divided by 1 plus the monthly equivalent of the Guaranteed Interest Rate for the Guaranteed Interest Division as shown in the Schedule; and b) is your Account Value as of the Monthly Processing Date after the monthly deductions (other than the cost of insurance for the Base Death Benefit, any Adjustable Term Insurance Rider and any Waiver of Monthly Deduction Rider). The cost of insurance rates will be determined by us from time to time. They will be based on the sex and age as of the Effective Date of coverage, the duration since the coverage began and the Premium Class. Any change in rates will apply to all individuals of the same Premium Class and whose policies have been in effect for the same length of time. The rates will never exceed those rates shown in the Table of Guaranteed Rates in the Schedule as adjusted for any substandard Premium Class. Each time there is a new coverage segment of Stated Death Benefit due to a requested increase, the net amount at risk will be allocated to each coverage segment in the same proportion that the Stated Death Benefit of that segment bears to the total Policy Stated Death Benefit. Different rates will apply to each segment depending upon the Premium Class, the Age as of the Effective Date of the increase and the duration since the Effective Date of the increase. Form 1197 (VUL) - MD Page 18 PERSISTENCY REFUND Each month your Policy or a coverage segment of Stated Death Benefit remains in force after its tenth Policy anniversary, we will credit your Account Value with a refund equivalent to 0.5% of your Account Value on an annual basis for that segment (0.04167% monthly). Your Account Value will be allocated to each coverage segment based upon the number of completed Policy years the segment has been in force and the size of the Guideline Annual Premium for the segment as shown in the Schedule. The persistency refund will be added to the Divisions of the Variable Account and the Guaranteed Interest Division in the same proportion that your Account Value in each Division bears to your net Account Value as of the Monthly Processing Date. LOAN PROVISIONS POLICY LOANS You may obtain a Policy Loan after the first Policy anniversary. The maximum amount you may borrow at any time equals (a) minus (b) where (a) is equal to: 1. Account Value minus (12 times the current monthly deduction); 2. Multiplied by (1 + Policy Loan Interest Rate); 3. Divided by (1 + Guaranteed Interest Rate credited to Loan Division); and where (b) is equal to any outstanding Policy Loan and accrued loan interest. However, at no time will the maximum amount you may borrow be less than 90% of the Account Value; minus any outstanding Policy Loan and accrued but unpaid interest. The Policy Loan is a first lien on your Policy. The minimum amount you may borrow is shown in the Schedule. The outstanding Policy Loan amount is equal to the loan amount as of the beginning of the Policy year plus new loans and minus loan repayments. LOAN INTEREST The annual Policy Loan interest rate is shown in the Schedule. If a loan is made, interest is due and payable at the end of the Policy year. Thereafter, interest on the loan amount is due annually at the end of each Policy year until the loan is repaid. If interest is not paid when due, it is added to the Policy Loan. If the Policy Loan amount and any accrued interest equals or exceeds the Cash Surrender Value, a Premium sufficient to keep this Policy in force must be paid as provided in the Grace Period Provision. LOAN DIVISION When a Policy Loan is taken or when interest is not paid in cash when due, an amount equal to the loan is transferred from the Divisions of the Variable Account and the Guaranteed Interest Division to the Loan Division to secure the loan. This amount will be deducted from the Divisions of the Variable Account and the Guaranteed Interest Division in the same proportion that your Account Value in each Division bears to your net Account Value as of the date the transfer is effective. Your Account Value in the Loan Division will be credited with interest at the interest rate for the Loan Division shown in the Schedule. Form 1197 (VUL) - MD Page 19 When a loan repayment is made an amount equal to the repayment is transferred from the Loan Division to the Guaranteed Interest Division and the Divisions of the Variable Account in the same proportion as your current Premium allocation unless you request a different allocation. PARTIAL WITHDRAWAL PROVISIONS You may apply for a Partial Withdrawal of your Account Value on any Monthly Processing Date after the first Policy anniversary by writing to us at our Customer Service Center. The minimum and maximum Partial Withdrawal amounts are shown in the Schedule. When a Partial Withdrawal is made, the amount of the withdrawal plus a service fee is deducted from your Account Value. The amount of the service fee is shown in the Schedule. We limit the number of Partial Withdrawals in a Policy year and this number is shown in the Schedule. If the Stated Death Benefit is reduced by a Partial Withdrawal during the first 14 years following the Policy date or following an increase in the Stated Death Benefit, a Surrender Charge will be deducted from your Account Value. The Stated Death Benefit is not reduced by a Partial Withdrawal taken when the Base Death Benefit has been increased to qualify your Policy as life insurance under the Federal income tax laws and the amount withdrawn is no greater than that which reduces your Account Value to the level which no longer requires the Base Death Benefit to be increased for Federal income tax law purposes. For a Policy under an Option 1 death benefit, the Stated Death Benefit is not reduced by a Partial Withdrawal in the circumstances described above. In addition, if no more than 16 years have elapsed since the Policy date and the Insured is not yet Age 81, a Partial Withdrawal of an amount up to 10% of your Account Value or, if greater, 5% of the Stated Death Benefit, calculated immediately before the Partial Withdrawal is taken will not reduce the State Death Benefit. Any additional amount withdrawn reduces your Stated Death Benefit by that additional amount. For a Policy under an Option 2 death benefit, a Partial Withdrawal does not reduce your Stated Death Benefit. For a Policy under an Option 3 death benefit, your Stated Death Benefit will be reduced by any amount of the Partial Withdrawal in excess of Premiums paid to the date of the Partial Withdrawal. Any reduction in death benefit or Account Value will occur as of the date the Partial Withdrawal occurs. No Partial Withdrawal will be allowed if the Stated Death Benefit remaining in force after any such Partial Withdrawal would be reduced below the minimum Stated Death Benefit shown in the Schedule. For a Policy under an Option 2 or Option 3 death benefit, a Partial Withdrawal reduces the Base Death Benefit by the amount of the withdrawal. Under any death benefit option, if the Base Death Benefit has been increased in order to qualify your Policy as a life insurance contract under the Federal income tax laws, the Partial Withdrawal reduces the Base Death Benefit by an amount greater than the withdrawal. If the Stated Death Benefit is reduced during the first 7 years of a coverage segment, a new Target Premium will be calculated and future maximum Surrender Charges will be reduced. If the Stated Death Benefit is reduced after the first 7 years of a coverage segment, the Surrender Charge is reduced in the same proportion that the Stated Death Benefit is reduced. You may specify how much of the withdrawal you wish taken from each Division of the Variable Account or from the Guaranteed Interest Division. You may not withdraw from the Guaranteed Interest Division more than the total withdrawal times the ratio of your Account Value in the Guaranteed Interest Division to your net Account Value immediately prior to the withdrawal. Unless you indicate otherwise, we will make the withdrawal from the amounts in the Guaranteed Interest Division and the Divisions of the Variable Account in the same proportion that your Form 1197 (VUL) Page 20 Account Value in each Division bears to your net Account Value immediately prior to the withdrawal. The withdrawal service fee and any Surrender Charge deducted from your Account Value is deducted from each Variable Division and the Guaranteed Interest Division in the same proportion that your Account Value of each Division bears to your net Account Value immediately after the withdrawal. We may send you a new Schedule to reflect the effect of the withdrawal, including any change to the Stated Death Benefit and Surrender Changes. We may ask you to return your Policy to our Customer Service Center to make this change. The withdrawal and the reductions in death benefits will be effective as of the Valuation Date after we receive your request. SURRENDER PROVISIONS SURRENDER VALUE The net Cash Surrender Value on any date will be your Account Value minus any applicable Surrender Charge and minus any Policy Loan including accrued but unpaid loan interest. SURRENDER CHARGES A separate Surrender Charge will apply to each Stated Death Benefit coverage segment. The maximum Surrender Charge for this Policy is the sum of the Administrative Surrender Charge and the Sales Surrender Charge for each coverage segment of Stated Death Benefit. The Surrender Charge will not exceed the total maximum Surrender Charge shown on page 5D of the Schedule. For purposes of calculating the Surrender Charge for a coverage segment, Premiums are allocated to a segment in the same proportion that the Guideline Annual Premium of each segment bears to the sum of the Guideline Annual Premiums of all segments. The Guideline Annual Premium for each coverage segment is shown on the Schedule. For each segment, the Surrender Charge consists of an administrative Surrender Charge and a sales Surrender Charge. The administrative Surrender Charge for each segment is determined from the administrative Surrender Charge table in the Schedule. It depends on the segment's Issue Age, Effective Date and initial Stated Death Benefit which are in the Schedule. For the first 7 Policy years following the Effective Date of a segment, the sales Surrender Charge is the lesser of: 50% of the Target Premium for the segment; or 25% of the sum of all Premiums paid up to the Target Premium for the segment plus 5% of the sum of all Premiums paid in excess of the Target Premium for the segment. Thereafter, the Sales Surrender Charge for the segment decreases at the beginning of each year following the 7th Policy year from the Effective Date of the segment by 12.5% of the Sales Surrender Charge in effect at the end of the 7th Policy Year until it reaches zero at the beginning of the 15th Policy year following the segment's Effective Date or the Policy year the Insured reaches the age of 98, whichever is sooner. The Target Premium is shown in the Schedule. During the first 14 Policy years or within 14 years of the Effective Date of an increase in the Sated Death Benefit segment, if you request a decrease to the Stated Death Benefit or take a Partial Withdrawal which causes the Stated Death Benefit to decrease, the administrative Surrender Charge will decrease in the same proportion that the Stated Death Benefit decreases. Upon a decrease in the Stated Death Benefit, a portion of the Surrender Charge will be deducted from your Account Value. The amount of the Surrender Charge which will be deducted from your Account Value will equal the Surrender Charge in effect before the decrease minus the Surrender Form 1197 (VUL) - MD Page 21 charge in effect after the decrease. The Surrender Charge after the decrease equals Sales Surrender Charge based upon the premiums previously paid and the new Target Premium after the decrease plus the Administrative Surrender Charge based upon the decreased face amount and the rates specified in the schedule page. If a decrease to the Stated Death Benefit occurs after the first 7 years of a coverage segment, the maximum Surrender Charges for the remaining Policy will be reduced by the percentage that the Stated Death Benefit is decreased. If a decrease occurs during the first 7 years of a coverage segment, the Target Premium will be recalculated; future maximum Surrender Charges for that coverage segment will be reduced. A Surrender Charge is not deducted from your Account Value if the Stated Death Benefit is decreased because the death benefit option is changed. BASIS OF COMPUTATIONS The Cash Surrender Value under the Policy is not less than the minimums required as of the Policy date by the state in which your Policy was delivered. A detailed statement of the method of computation of Policy values under the Policy has been filed with the insurance department of the state in which the Policy was delivered, if required. FULL SURRENDERS You may surrender your Policy after the Right to Examine Policy Period or at any time during the lifetime of the Insured and receive the net Cash Surrender Value. We will compute the net Cash Surrender Value as of the next Valuation Date after we receive both your request and the Policy at our Customer Service Center. This Policy will be canceled as of the date we receive your request, and there will be no further benefits under this Policy. GRACE PERIOD, TERMINATION AND REINSTATEMENT PROVISIONS GRACE PERIOD If the following conditions occur on a Monthly Processing Date, the Policy will enter into the 61 day Grace Period: a) The net Cash Surrender Value is zero or less; and b) The three year continuation period described below has expired or the required Premium for the three year continuation period has not been paid. We will give you a 61 day Grace Period from this Monthly Processing Date to make the required Premium payment. The required Premium payment then due must be paid to keep the Policy in force. If this amount is not received in full by the end of the Grace Period, the Policy will lapse without value. The required Premium payment will be equal to past due charges plus an amount we expect to be sufficient to keep the Policy and any riders in force for 2 months following the receipt of the required Premium payment. If we receive at least the required Premium payment during the Grace Period we will make deductions from the Net Premium payment for the past due amounts and apply any remaining amount as Premium to the Policy. Notice of the amount of the required Premium payment will be mailed to you or any assignee at the last known address at least 30 days before the end of the Grace Period. If the Insured dies during the Grace Period, we will deduct any overdue monthly deductions from the death Proceeds of the Policy. Form 1197 (VUL) - MD Page 22 THREE YEAR CONTINUATION PERIOD During the first 3 Policy years, if at all times the sum of your Premiums paid minus the sum of your Partial Withdrawals, Policy Loans taken and accrued but unpaid interest, is greater than or equal to: one-twelfth of the Minimum Annual Premium multiplied by the number of complete months your Policy has been in force, your Policy will remain in force regardless of the net Cash Surrender Value. The Minimum Annual Premium is shown in the Schedule. If you increase the Stated Death Benefit during the first 3 Policy years, the new Schedule will show a revised Minimum Annual Premium which will be used for future tests to determine if your Policy will remain in force under this provision. TERMINATION All coverage provided by this Policy will end as of the earliest of: a) The date the Policy is surrendered; b) The date of death of the Insured; c) The Maturity Date of the Policy; or d) The date the Grace Period ends without payment of the required Premium. REINSTATEMENT The Policy may be reinstated within five years after the beginning of the Grace Period. The reinstatement will be effective as of the Monthly Processing Date on or next following the date we approve your written application. We will reinstate the Policy and any riders if the following conditions are met: a) You have not surrendered the Policy for its net Cash Surrender Value; b) You submit evidence satisfactory to us that the Insured and those insured under any riders are still insurable according to our normal rules of underwriting for this type of Policy; and c) We receive payment of the amount of Premium sufficient to keep the Policy and any riders in force from the beginning of the Grace Period to the end of the expired Grace Period and for 2 months after the date of reinstatement. We will let you know, at the time you request reinstatement, the amount of Premium needed for this purpose. The Surrender Charge as of the date of reinstatement will equal the Surrender Charge as of the beginning of the Grace Period. We will reinstate any Policy Loan, with accrued loan interest to the end of the Grace Period, which existed when coverage ended. Upon reinstatement, the Net Premium received minus past due amounts will be allocated to the Divisions of the Variable Account and the Guaranteed Interest Division according to the Premium allocation percentages in effect at the start of the Grace Period or as directed by you in writing at the time of reinstatement. Form 1197 (VUL) - MD Page 23 DEFERRAL OF PAYMENT Requests for transfers, withdrawals, payment of proceeds on the Maturity Date or a full surrender will be processed within 7 days of receipt of the request in a form acceptable to us. However, we may postpone the processing of any such Variable Account transactions for any of the following reasons: a) The NYSE is closed, other than customary weekend and holiday closings. b) Trading on the NYSE is restricted by the SEC. c) The SEC declares that an emergency exists as a result of which disposal of securities in the Variable Account is not reasonably practicable to determine your Account Value in the Divisions. d) A governmental body having jurisdiction over the Variable Account by order permits such suspension. Rules and regulations of the SEC, if any, are applicable and will govern as to whether conditions described in (b), (c), or (d) exist. Death proceeds will be paid within 7 days of determination of the proceeds and are not subject to deferment. We may defer for up to 6 months payment of any surrender proceeds, withdrawal or loan amounts from the Guaranteed Interest Division, unless such payment will be made to pay Premiums on Policies in force with this Company. GENERAL POLICY PROVISIONS THE POLICY The Policy, including the original application and applications for an increase, riders, endorsements, any Schedule pages, and any reinstatement applications make up the entire contract between you and us. A copy of the original application will be attached to the Policy at issue. A copy of any application as well as a new Schedule will be attached or furnished to you for attachment to the Policy at the time of any change in coverage. In the absence of fraud, all statements made in any application will be considered representations and not warranties. No statement will be used to deny a claim unless it is in an application. AGE The Policy is issued at the Age shown in the Schedule. This is the Insured's Age nearest birthday on the Policy date. The Insured's Age at any time is the Age shown in the Schedule increased by the number of completed Policy years. PROCEDURES We must receive any election, designation, assignment or any other change request you make in writing, except those specified on the application. It must be in a form acceptable to us. We may require a return of the Policy for any change or for a full surrender. We are not liable for any action we take before we receive and record the written request at our Customer Service Center. In the event of the death of the Insured before the Maturity Date, please let us or our agent know as soon as possible. Claim procedure instructions will be sent to the Beneficiary immediately. We may require proof of Age and a certified copy of the death certificate. We may require the Beneficiary and next of kin to sign authorizations as part of due proof. These authorization forms allow us to obtain information about the Insured, including, but not limited to, medical records of physicians and hospitals used by the Insured. Form 1197 (VUL) - MD Page 24 OWNERSHIP The original Owner is the person named as the Owner in the application. You, as the Owner, can exercise all rights and receive the benefits during the Insured's life before the Maturity Date. This includes the right to change the Owner, Beneficiaries, and methods for the payment of proceeds. All rights of the Owner are subject to the rights of any assignee and any irrevocable Beneficiary. You may name a new Owner by sending written notice to us. The Effective Date of the change to the new Owner will be the date you sign the notice. The change will not affect any payment made or action taken by us before recording the change at our Customer Service Center. BENEFICIARIES The primary Beneficiary surviving the Insured will receive any death Proceeds which become payable. Surviving contingent Beneficiaries are paid death Proceeds only if no primary Beneficiary has survived the Insured. If more than one Beneficiary in a class survives the Insured, they will share the death Proceeds equally, unless your designation provides otherwise. If there is no designated Beneficiary surviving, you or your estate will be paid the death Proceeds. The Beneficiary designation will be on file with us or at a location designated by us. While you are living, you may name a new Beneficiary. The Effective Date of the change will be the date the request was signed. We will pay proceeds to the most recent Beneficiary designation on file. We will not be subject to multiple payments. EXCHANGE RIGHT If, for any reason within the first 24 months, you want to exchange this Policy for a Policy in which values do not vary with the investment experience of the Variable Account, we will exchange this Policy so long as premiums are duly paid. Option (1) or (2) can be chosen by the policy holder and the exchange will be implemented in one of two ways: (1) by exchanging for another permanent fixed benefit life insurance policy offered in this state by us; or (2) by transferring your Account Value in all the Divisions of the Variable Account to the Guaranteed Interest Division and removing your future right to choose to allocate funds to the Divisions of the Variable Account. This transfer will not be subject to the Excess Transfer Charge. If a new policy is chosen it will comply with the following conditions: (a) shall bear the same date of issue and age at issue as the original variable life insurance policy; and (b) issued on a comparable plan of permanent insurance offered in this state by the insurer at premium rates in effect on that date for the same class of insurance; and (c) includes such riders and incidental insurance benefits that were included in the original policy if such riders and incidental insurance benefits are issued with fixed benefit policies; and (d) are subject to an equitable premium or cash value adjustment that takes appropriate account of the premiums and cash values under the original and new policies; and detailed statement of the method of computing such adjustment is on file with the Commissioner of the state in which this policy is delivered; and Form 1197 (VUL) - MD Page 25 (e) shall not require evidence of insurability for this exchange. We will require a return of this Policy before this change will be processed. CONTRACT CHANGES All changes made by us must be signed by our president or an officer and by our secretary or assistant secretary. No other person can change any of this Contract's terms and conditions. COLLATERAL ASSIGNMENT You may assign this Policy as collateral security by written notice to us. Once it is recorded with us, the rights of the Owner and Beneficiary are subject to the assignment. It is your responsibility to make sure the assignment is valid. INCONTESTABILITY After this Policy has been in force during the Insured's life for 2 years from the Policy date, we will not contest the statements in the application attached at issue. After this Policy has been in force during the Insured's life for 2 years from the Effective Date of any increase in any benefit with respect to the Insured, we will not contest the statements in the application for the increase. After this Policy has been in force during the Insured's life for 2 years from the Effective Date of any reinstatement, we will not contest the statements in the application for such reinstatement. MISSTATEMENT OF AGE OR SEX If the Age of the Insured has been misstated, the death benefit will be adjusted. The death benefit will be that which the cost of insurance which was deducted from you Account Value on the last Monthly Processing Date prior to the death of the Insured would have purchased for the Insured's correct Age and sex. SUICIDE EXCLUSION If the Insured commits suicide, while sane or insane, within 2 years of the date of issue, we will make a limited payment to the Beneficiary. We will pay in one sum the amount of all Premiums paid to us during that time, minus any outstanding Policy Loan (including accrued but unpaid interest) and Partial Withdrawals. If the Insured commits suicide, while sane or insane, within 2 years of the Effective Date of an increase in the Stated Death Benefit, we will make a limited payment to the Beneficiary for the increase. This payment will equal the cost of insurance and any applicable monthly expense charges deducted for such increase. Form 1197 (VUL) - MD Page 26 PERIODIC REPORTS We will send you at least once each year a report which shows the current Account Value, Cash Surrender Value and Premiums paid since the last report. The report will also show the allocation of your Account Value as of the date of the report and the amounts added to or deducted from your Account Value of each Division since the last report. The report will include any other information that may be currently required by the Insurance supervisory official of the jurisdiction in which this Policy is delivered. ILLUSTRATION OF BENEFITS AND VALUES We will send you, upon written request, a hypothetical illustration of future death benefits and Account Values. This illustration will include the information as required by the laws or regulations where this Policy is delivered. If you request more than one illustration during a Policy year, we will charge a reasonable fee for each additional illustration. The maximum amount of this fee is shown in the Schedule. NONPARTICIPATING The Policy does not participate in our surplus earnings. CUSTOMER SERVICE CENTER Our Customer Service Center is at the address shown in the Schedule. Unless you are otherwise notified: a) All requests and payments should be sent to us at our Customer Service Center; and b) All transactions are effective as of the Valuation Date the required information is received at our Customer Service Center. PAYOUTS OTHER THAN AS ONE SUM ELECTION During the Insured's lifetime, you may elect that the Beneficiary receive the proceeds upon death of the Insured other than in one sum. If you have not made an election, the Beneficiary may do so within 60 days after the Insured's death. You may also elect to take the net Cash Surrender Value of the Policy upon its surrender other than in one sum. Satisfactory written request must be received at our Customer Service Center before payment can be made. A payee that is not a natural person may not be named without our consent. The various methods of settlement are described in the following Payout Options section. PAYOUT OPTIONS OPTION I. PAYOUTS FOR A DESIGNATED PERIOD. Payouts will be made in 1, 2, 4, or 12 installments per year as elected for a designated period, which may be 5 to 30 years. The installment dollar amounts will be equal except for any Excess Interest as described below. The amount of the first monthly payout for each $1,000 of Account Value applied is shown in Settlement Option Table I. OPTION II. LIFE INCOME WITH PAYOUTS FOR DESIGNATED PERIOD. Payouts will be made in 1, 2, 4, or 12 installments per year throughout the payees lifetime, or if longer, for a period of 5, 10, 15 or 20 years as elected. The installment dollar amounts will be equal except for any Excess Interest, as described below. The amount of the first monthly payout for each $1,000 of Account Value applied is shown in Settlement Option Table II. This option is not available for ages not shown in the Table. Form 1197 (VUL) Page 27 OPTION III. HOLD AT INTEREST. Amounts may be left on deposit with us to be paid upon the death of the payee or at any earlier date elected. Interest on any unpaid balance will be at the rate declared by us or at any higher rate required by law. Interest may be accumulated or paid in 1, 2, 4, or 12 installments per year, as elected. Money may not be left on deposit for more than 30 years. OPTION IV. PAYOUTS OF A DESIGNATED AMOUNT. Payouts will be made until proceeds, together with interest, which will be at the rate declared by us or at any higher rate required by law, are exhausted. Payouts will be made in 1, 2, 4, or 12 equal installments per year, as elected. OPTION V. OTHER. Settlement may be made in any other manner as agreed upon in writing between you (or the Beneficiary) and us. CHANGE AND WITHDRAWAL You may change an election at any time before the death of the Insured or maturity of the Policy. If you have given the Beneficiary the right to make changes or withdrawals, or if the Beneficiary has elected the option, the Beneficiary (as primary payee) may take the actions below. a) Changes may be made from Payout Options I, III, and IV to another option. b) Full withdrawals may be made under Payout Option III or IV. Partial Withdrawals of not less than $300 may be made under Payout Option III. c) Remaining installments under Payout Option I may be commuted at 3 1/2% interest and received in one sum. d) Changes in any contingent payee designation may be made. A written request must be sent to our Customer Service Center in writing to make a change or withdrawal. We also may require that you send in the Supplemental Policy. We may defer payment of commuted and withdrawable amounts for a period up to 6 months. EXCESS INTEREST If we declare that Payout Options are to be credited with an interest rate above that guaranteed, it will apply to Payout Options I, II, III, and IV. The crediting of excess interest for one period does not guarantee the higher rate for other periods. Any declared interest rate will be in effect for at least 12 months. MINIMUM AMOUNTS The minimum amount which may be applied under any option is $2,000. If the payments to the payee are ever less than $20, we may change the frequency of payments so as to result in payments of at least that amount. SUPPLEMENTARY POLICY When an option becomes effective, the Policy will be surrendered in exchange for a Supplementary Policy. It will provide for the manner of settlement and rights of the payees. The Supplementary Policy's Effective Date will be the date of the Insured's death or the date of other settlement. The first payment under Options I, II, and IV will be payable as of the Effective Date. The first interest payment under Option III will be made as of the end of the interest payment period elected. Subsequent payments will be made in accordance with the frequency of payment elected. The Supplementary Policy may not be assigned or payments made to another without our consent. Form 1197 (VUL) Page 28 INCOME PROTECTION Unless otherwise provided in the election, a payee does not have the right to commute, transfer or encumber amounts held or installments to become payable. To the extent provided by law, the proceeds, amount retained, and installments are not subject to any payees debts, policies, or engagements. DEATH OF PRIMARY PAYEE Upon the primary payees death, any payments certain under Option I or II, interest payments under Option III, or payments under Option IV will be continued to the contingent payee. Or, amounts may be released in one sum if permitted by the Policy. The final payee will be the estate of the last to die of the primary payee and any contingent payee. PAYMENTS OTHER THAN MONTHLY The tables which follow show monthly installments for Options I and II. To arrive at annual, semiannual, or quarterly payments, multiply the appropriate figures by 11.813, 5.957 or 2.991 respectively. Factors for other periods certain or for other options which may be provided by mutual agreement will be provided upon reasonable request. Form 1197 (VUL) Page 29 SETTLEMENT OPTION TABLE I (Per $1,000 of Net Proceeds)
------------------------------------------------------------------ No. of Monthly No. of Monthly Years Payable Installments Years Payable Installments ------------------------------------------------------------------ 5 18.12 16 6.76 ------------------------------------------------------------------ 17 6.47 ------------------------------------------------------------------ 6 15.35 18 6.20 ------------------------------------------------------------------ 7 13.38 19 5.97 ------------------------------------------------------------------ 8 11.90 20 5.75 ------------------------------------------------------------------ 9 10.75 ------------------------------------------------------------------ 10 9.83 21 5.56 ------------------------------------------------------------------ 22 5.39 ------------------------------------------------------------------ 11 9.09 23 5.24 ------------------------------------------------------------------ 12 8.46 24 5.09 ------------------------------------------------------------------ 13 7.94 25 4.96 ------------------------------------------------------------------ 14 7.49 ------------------------------------------------------------------ 15 7.10 26 4.84 ------------------------------------------------------------------ 27 4.73 ------------------------------------------------------------------ 28 4.63 ------------------------------------------------------------------ 29 4.53 ------------------------------------------------------------------ 30 4.45 ------------------------------------------------------------------
Form 1197 (VUL) - MD Page 30 SETTLEMENT OPTION TABLE II
- ------------------------------------------------------------------------------------------------------------------------------------ (Per $1,000 of Net Proceeds) - ------------------------------------------------------------------------------------------------------------------------------------ Age of Payee Nearest Age of Payee Nearest Birthday When First Birthday When First Installment is Payable Monthly Installment Installment is Payable Monthly Installment - ------------------------------------------------------------------------------------------------------------------------------------ 5 Years 10 Years 15 Years 20 Years 5 Years 10 Years 15 Years 20 Years Male Female Certain Certain Certain Certain Male Female Certain Certain Certain Certain - ------------------------------------------------------------------------------------------------------------------------------------ 15 20 3.31 3.31 3.31 3.31 33 38 3.77 3.77 3.75 3.74 - ------------------------------------------------------------------------------------------------------------------------------------ 16 21 3.33 3.33 3.33 3.32 34 39 3.80 3.80 3.79 3.77 - ------------------------------------------------------------------------------------------------------------------------------------ 17 22 3.35 3.35 3.34 3.34 35 40 3.84 3.84 3.83 3.81 - ------------------------------------------------------------------------------------------------------------------------------------ 18 23 3.37 3.37 3.36 3.36 36 41 3.88 3.88 3.87 3.84 - ------------------------------------------------------------------------------------------------------------------------------------ 19 24 3.39 3.38 3.38 3.38 37 42 3.93 3.93 3.91 3.88 - ------------------------------------------------------------------------------------------------------------------------------------ 20 25 3.41 3.40 3.40 3.40 38 43 3.97 3.97 3.95 3.92 - ------------------------------------------------------------------------------------------------------------------------------------ 21 26 3.43 3.43 3.42 3.42 39 44 4.02 4.02 4.00 3.96 - ------------------------------------------------------------------------------------------------------------------------------------ 22 27 3.45 3.45 3.44 3.44 40 45 4.07 4.07 4.05 4.00 - ------------------------------------------------------------------------------------------------------------------------------------ 23 28 3.47 3.47 3.47 3.46 41 46 4.13 4.13 4.09 4.05 - ------------------------------------------------------------------------------------------------------------------------------------ 24 29 3.50 3.49 3.49 3.48 42 47 4.18 4.18 4.14 4.09 - ------------------------------------------------------------------------------------------------------------------------------------ 25 30 3.52 3.52 3.57 3.51 43 48 4.24 4.24 4.20 4.14 - ------------------------------------------------------------------------------------------------------------------------------------ 26 31 3.55 3.54 3.54 3.53 44 49 4.30 4.30 4.25 4.18 - ------------------------------------------------------------------------------------------------------------------------------------ 27 32 3.58 3.57 3.57 3.56 45 50 4.36 4.36 4.31 4.23 - ------------------------------------------------------------------------------------------------------------------------------------ 28 33 3.60 3.60 3.59 3.58 46 51 4.43 4.43 4.37 4.28 - ------------------------------------------------------------------------------------------------------------------------------------ 29 34 3.64 3.63 3.60 3.61 47 52 4.49 4.49 4.43 4.34 - ------------------------------------------------------------------------------------------------------------------------------------ 30 35 3.67 3.66 3.65 3.64 48 53 4.56 4.56 4.49 4.39 - ------------------------------------------------------------------------------------------------------------------------------------ 31 36 3.70 3.70 3.69 3.67 49 54 4.64 4.64 4.55 4.44 - ------------------------------------------------------------------------------------------------------------------------------------ 32 37 3.74 3.73 3.72 3.70 50 55 4.77 4.71 4.62 4.50 - ------------------------------------------------------------------------------------------------------------------------------------
Form 1197 (VUL) Page 31 SETTLEMENT OPTION TABLE II (Continued)
- ------------------------------------------------------------------------------------------------------------------------------------ ( Per $1,000 of Net Proceeds) - ------------------------------------------------------------------------------------------------------------------------------------ Age of Payee Nearest Age of Payee Nearest Birthday When First Birthday When First Installment is Payable Monthly Installment Installment is Payable Monthly Installment - ------------------------------------------------------------------------------------------------------------------------------------ 5 Years 10 Years 15 Years 20 Years 5 Years 10 Years 15 Years 20 Years Male Female Certain Certain Certain Certain Male Female Certain Certain Certain Certain - ------------------------------------------------------------------------------------------------------------------------------------ 51 56 4.85 4.79 4.69 4.55 69 74 7.52 7.00 6.29 5.56 - ------------------------------------------------------------------------------------------------------------------------------------ 52 57 4.94 4.87 4.76 4.61 70 75 7.77 7.17 6.38 5.60 - ------------------------------------------------------------------------------------------------------------------------------------ 53 58 5.04 4.96 4.84 4.67 71 76 8.04 7.35 6.47 5.63 - ------------------------------------------------------------------------------------------------------------------------------------ 54 59 5.14 5.05 4.91 4.73 72 77 8.32 7.53 6.55 5.66 - ------------------------------------------------------------------------------------------------------------------------------------ 55 60 5.24 5.14 4.99 4.79 73 78 8.62 7.71 6.63 5.68 - ------------------------------------------------------------------------------------------------------------------------------------ 56 61 5.35 5.24 5.07 4.85 74 79 8.94 7.89 6.71 5.70 - ------------------------------------------------------------------------------------------------------------------------------------ 57 62 5.47 5.34 5.15 4.91 75 80 9.28 8.07 6.78 5.72 - ------------------------------------------------------------------------------------------------------------------------------------ 58 63 5.59 5.45 5.24 4.97 76 81 9.63 8.25 6.84 5.73 - ------------------------------------------------------------------------------------------------------------------------------------ 59 64 5.71 5.56 5.33 5.03 77 82 10.00 8.43 6.89 5.74 - ------------------------------------------------------------------------------------------------------------------------------------ 60 65 5.85 5.68 5.42 5.10 78 83 10.39 8.60 6.94 5.74 - ------------------------------------------------------------------------------------------------------------------------------------ 61 66 5.99 5.80 5.51 5.16 79 84 10.80 8.77 6.98 5.75 - ------------------------------------------------------------------------------------------------------------------------------------ 62 67 6.15 5.93 5.61 5.21 80 85 11.22 8.93 7.01 5.75 - ------------------------------------------------------------------------------------------------------------------------------------ 63 68 6.31 6.07 5.70 5.27 81 11.66 9.08 7.04 5.75 - ------------------------------------------------------------------------------------------------------------------------------------ 64 69 6.48 6.21 5.80 5.33 82 12.12 9.21 7.06 5.75 - ------------------------------------------------------------------------------------------------------------------------------------ 65 70 6.66 6.35 5.90 5.38 83 12.60 9.34 7.07 5.75 - ------------------------------------------------------------------------------------------------------------------------------------ 66 71 6.86 6.50 6.00 5.43 84 13.09 9.44 7.08 5.75 - ------------------------------------------------------------------------------------------------------------------------------------ 67 72 7.07 6.66 6.10 5.48 85 13.59 9.54 7.09 5.75 - ------------------------------------------------------------------------------------------------------------------------------------ 68 73 7.29 6.83 6.19 5.52 - ------------------------------------------------------------------------------------------------------------------------------------
Form 1197 (VUL) Page 32 This Policy is a FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY. This is a Non-Participating Policy Death benefits and other values provided by this contract, when based on the investment experience of a separate account, are variable. These values may increase or decrease based on investment experience and are not guaranteed as to fixed dollar amount. Death benefits are payable by us upon the death of the Insured prior to the Maturity Date. Your Net Account Value, if any, is payable by us if the insured is living as of the Maturity Date. However, at no time will the maximum amount you may borrow be less than 90% of the Account Value; minus any outstanding Policy Loan and accrued but unpaid interest. Flexible Premiums are payable by you during the lifetime of the Insured until the Maturity Date. The death benefit will be at least equal to the Stated Benefit amount at issue if Premiums are duly paid and if there are no outstanding Policy Loans, Partial Withdrawals, or Partial Surrenders. Refer to the Payout of Proceeds provisions for additional information. SECURITY LIFE OF DENVER INSURANCE COMPANY A Stock Company CUSTOMER SERVICE CENTER P.O. Box 173763, Denver, Colorado 80217-3763 Toll Free Number: 1(800)933-5858 Form 1197 (VUL) - MD EX-1.A(5)(A)(II) 5 EXHIBIT 1.A(5) (A) (II) Exhibit 1.A(5)(a)(ii) SECURITY LIFE OF DENVER INSURANCE COMPANY INSURED: Mr JOHN DOE POLICY DATE: January 1, 1996 POLICY NUMBER: 6100001 STATED DEATH BENEFIT: $100,000.00 WE AGREE TO PAY the death benefit to the Beneficiary upon the death of the Insured while this Policy is in force. WE AGREE TO PAY your Net Account Value to you as of the Maturity Date if the Insured is living on that date. WE ALSO AGREE to provide the other rights and benefits of the Policy. These agreements are subject to the provisions of the Policy. RIGHT TO EXAMINE POLICY PERIOD. You have the right to examine and return this Policy within 10 days after receipt. The policy will be deemed to have been received by you 5 days after the policy is mailed from our Customer Service Center. The Policy may be returned by delivering or mailing it to us at our Customer Service Center. Immediately upon return it will be deemed void as of the Policy Date. Upon return of the Policy to us, we will refund all premiums paid. /s/ Stephen M. Christopher /s/ Stephen M. Christopher Secretary President In this Policy "you" and "your" refer to the Owner of the Policy. "We", "us" and "our" refer to Security Life of Denver Insurance Company. THIS POLICY IS A FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY. DEATH BENEFITS AND POLICY VALUES PROVIDED BY THIS CONTRACT, WHEN BASED ON THE INVESTMENT EXPERIENCE OF A SEPARATE ACCOUNT, ARE VARIABLE. THESE VALUES MAY INCREASE OR DECREASE BASED ON INVESTMENT EXPERIENCE AND ARE NOT GUARANTEED AS TO FIXED DOLLAR AMOUNT. DEATH BENEFITS ARE PAYABLE BY US UPON THE DEATH OF THE INSURED PRIOR TO THE MATURITY DATE AS DESCRIBED IN THE PAYOUT OF PROCEEDS PROVISION. UNDER CERTAIN CIRCUMSTANCES THE ENTIRE INVESTMENT COULD BE LOST, DEPENDING ON THE PERFORMANCE OF THE SEPARATE ACCOUNT, AND AS A RESULT THERE COULD BE NO DEATH BENEFIT ABSENT ADDITIONAL PAYMENTS MADE TO KEEP THE POLICY IN FORCE. YOUR NET ACCOUNT VALUE, IF ANY, IS PAYABLE BY US IF THE INSURED IS LIVING AS OF THE MATURITY DATE. FLEXIBLE PREMIUMS ARE PAYABLE BY YOU DURING THE LIFETIME OF THE INSURED UNTIL THE MATURITY DATE. SECURITY LIFE OF DENVER INSURANCE COMPANY A Stock Company Customer Service Center [P.O. BOX 173763, Denver, Colorado 80217-3763 Toll Free Number: 1(800)933-5858] Form 1197 (VUL) - MA - 5/97 TABLE OF CONTENTS SCHEDULE................................................................. 5 DEFINITION OF TERMS...................................................... 6 INSURANCE COVERAGE PROVISIONS............................................ 7 INITIAL PREMIUM ALLOCATION.......................................... 7 VALUATION DATE...................................................... 7 VALUATION PERIOD.................................................... 7 EFFECTIVE DATE OF COVERAGE.......................................... 7 PAYOUT OF PROCEEDS.................................................. 7 BASE DEATH BENEFIT.................................................. 8 CHANGE IN REQUESTED INSURANCE COVERAGE.............................. 8 Requested Increases in Coverage................................ 9 Requested Decreases in Coverage................................ 9 Death Benefit Option Changes................................... 9 PREMIUM PROVISIONS....................................................... 10 PLANNED PREMIUMS.................................................... 10 UNPLANNED PREMIUMS................................................ 10 PREMIUM LIMITATION.................................................. 10 PREMIUM ALLOCATION.................................................. 11 VARIABLE ACCOUNT PROVISIONS.............................................. 11 THE VARIABLE ACCOUNT................................................ 11 VARIABLE ACCOUNT DIVISIONS.......................................... 11 CHANGES WITHIN THE VARIABLE ACCOUNT................................. 11 GENERAL ACCOUNT PROVISIONS............................................... 12 THE GENERAL ACCOUNT................................................. 13 GUARANTEED INTEREST DIVISION........................................ 13 LOAN DIVISION....................................................... 13
Form 1197 (VUL) - MA - 5/97 Page 2 TRANSFER PROVISIONS....................................................... 13 TRANSFERS TO OR FROM THE GUARANTEED INTEREST DIVISION................ 13 EXCESS TRANSFER CHARGE............................................... 14 DOLLAR COST AVERAGING................................................ 14 AUTOMATIC REBALANCING................................................ 15 ACCOUNT VALUE PROVISIONS.................................................. 15 NET PREMIUM.......................................................... 16 ACCOUNT VALUES ON THE INVESTMENT DATE................................ 16 ACCUMULATION UNIT VALUE.............................................. 16 ACCUMULATION EXPERIENCE FACTOR....................................... 16 ACCOUNT VALUE OF THE DIVISIONS OF THE VARIABLE ACCOUNT............... 17 ACCOUNT VALUE OF THE GUARANTEED INTEREST DIVISION.................... 17 ACCOUNT VALUE OF THE LOAN DIVISION................................... 17 MONTHLY DEDUCTION AND REFUND.............................................. 18 MONTHLY DEDUCTION.................................................... 18 COST OF INSURANCE.................................................... 18 PERSISTENCY REFUND................................................... 19 LOAN PROVISIONS........................................................... 19 POLICY LOANS......................................................... 19 LOAN INTEREST........................................................ 19 LOAN DIVISION........................................................ 19 PARTIAL WITHDRAWAL PROVISIONS............................................. 20 SURRENDER PROVISIONS...................................................... 21 SURRENDER VALUE...................................................... 21 SURRENDER CHARGES.................................................... 21 BASIS OF COMPUTATIONS................................................ 22 FULL SURRENDERS...................................................... 22 GRACE PERIOD, TERMINATION AND REINSTATEMENT PROVISIONS.................... 22 GRACE PERIOD......................................................... 22 THREE YEAR CONTINUATION PERIOD....................................... 23
Form 1197 (VUL) - MA - 5/97 Page 3 TERMINATION.......................................................... 23 REINSTATEMENT........................................................ 23 DEFERRAL OF PAYMENT.................................................. 24 GENERAL POLICY PROVISIONS................................................. 24 THE POLICY........................................................... 24 AGE.................................................................. 24 PROCEDURES........................................................... 24 OWNERSHIP............................................................ 24 BENEFICIARIES........................................................ 25 EXCHANGE RIGHT....................................................... 25 COLLATERAL ASSIGNMENT................................................ 25 INCONTESTABILITY..................................................... 25 MISSTATEMENT OF AGE OR SEX........................................... 26 SUICIDE EXCLUSION.................................................... 26 PERIODIC REPORTS..................................................... 26 ILLUSTRATION OF BENEFITS AND VALUES.................................. 26 NONPARTICIPATING..................................................... 26 CUSTOMER SERVICE CENTER.............................................. 26 PAYOUTS OTHER THAN AS ONE SUM............................................. 26 ELECTION............................................................. 26 PAYOUT OPTIONS....................................................... 27 CHANGE AND WITHDRAWAL................................................ 27 EXCESS INTEREST...................................................... 27 MINIMUM AMOUNTS...................................................... 28 SUPPLEMENTARY POLICY................................................. 28 INCOME PROTECTION.................................................... 28 DEATH OF PRIMARY PAYEE............................................... 28 PAYMENTS OTHER THAN MONTHLY.......................................... 28 SETTLEMENT OPTION TABLES.................................................. 29
Additional benefits or riders, if any, will be listed in the Schedule. The additional provisions will be inserted in the Policy. Form 1197 (VUL) - 5/97 Page 4 SCHEDULE (Effective Date: January 1, 1996) POLICY INFORMATION Policy Number 61000001 Minimum Stated Death Benefit $50,000.00 Insured Mr JOHN DOE Death Benefit Option OPTION 1: GP/CVC LEVEL DB Age And Sex 35, Male Three Year Continuation Period January 1, 1999 Ending Date Premium Class High Band Non-Smoker Three Year Continuation Period $529.00 Minimum Annual Premium Policy Date January 1, 1996 Planned Premium $1,600.00, Annually Maturity Date January 1, 2061
Definition of Life Insurance Test: Guideline Premium CUSTOMER SERVICE CENTER: [P.O. BOX 173763, Denver, Colorado 80217-3763] Coverage will expire prior to the Maturity Date if Premiums are insufficient to continue coverage and the Three Year Continuation Period has ended. Coverage will also be affected by Partial Withdrawals, Policy Loans, changes in the current cost of insurance rates, the actual credited interest rate for the Guaranteed Interest Division and the investment experience of the Variable Account. Form 1197 (VUL) - MA - 5/97 Page 5 SCHEDULE (Continued) BENEFIT PROFILE
- --------------------------------------------------------------------------------------------------------------------- Initial Segment Age At Guideline Benefit Issue Maturity Effective Annual Target Description Amount Age Date Date Premium Premium - --------------------------------------------------------------------------------------------------------------------- Stated Death Benefit (Segment #1) $100,000.00 35 100 January 1, 1996 $1,400.80 $941.00 - ---------------------------------------------------------------------------------------------------------------------
Form 1197 (VUL) - 5/97 Page 5A SCHEDULE (CONTINUED) ALLOCATION OF INITIAL PREMIUM AS SHOWN ON APPLICATION [Neuberger & Berman Limited Maturity Bond ] 50% [Neuberger & Berman Growth ] 50% [Neuberger & Berman Government Income ] 0% [Neuberger & Berman Partners ] 0% [Alger American Growth ] 0% [Alger American Leveraged All Cap ] 0% [Alger American Small Capital ] 0% [Alger American MidCap Growth ] 0% [Fidelity Asset Manager ] 0% [Fidelity Growth ] 0% [Fidelity Overseas ] 0% [Fidelity Money Market ] 0% [Fidelity Index 500 0% [INVESCO Total Return ] 0% [INVESCO Industrial Income ] 0% [INVESCO High Yield ] 0% [INVESCO Utilities ] 0% [Van Eck Worldwide Balanced ] 0% [Van Eck Gold and Natural Resources ] 0% Guaranteed Interest Division ] 0%
If you elect to invest in a particular Division, at least 1% of your Net Premium must be allocated to that Division provided that the allocation to each Division selected is at least $100. All percentage allocations must be in whole numbers. Form 1197 (VUL) - 5/97 Page 5B SCHEDULE (Continued) EXPENSE CHARGES PREMIUM EXPENSE CHARGES (As a Percent of all Premiums): Sales Load: Segment Issue Age Sales Load 0 - 49 2.25% 50 - 59 3.25% 60+ 4.25% State And Local Taxes: [2.5%] Federal Deferred Acquisition Cost Charge: [1.5%] We reserve the right to increase or decrease the Premium Expense Charges for taxes due to any change in tax law. We further reserve the right to increase or decrease the Premium Expense Charges for Federal deferred acquisition costs due to any change in the cost to us. MONTHLY EXPENSE CHARGES: $13.00 per Policy month for the first 36 months $3.00 per Policy month thereafter; plus $0.0125 per thousand of Stated Death Benefit (or Target Death Benefit, if greater), all years. The per thousand charge is limited to $15.00 per Policy month. ANNUAL MORTALITY AND EXPENSE RISK CHARGE (Based on the percentage of assets in each Variable Account Division) Mortality And Expense Risk Charge 0.75% Form 1197 (VUL) - MA - 5/97 Page 5C SCHEDULE (CONTINUED) SURRENDER CHARGES The maximum Surrender Charges which pertain to the insurance coverages shown in the Schedule are shown in the following table. This table may change upon any increases and/or decreases in the Policy's Stated Death Benefit.
-------------------------------------------- SURRENDERS DURING THE POLICY YEAR TOTAL MAXIMUM ENDING SURRENDER CHARGE -------------------------------------------- -------------------------------------------- 1997 $720.50 -------------------------------------------- 1998 $720.50 -------------------------------------------- 1999 $720.50 -------------------------------------------- 2000 $720.50 -------------------------------------------- 2001 $720.50 -------------------------------------------- 2002 $720.50 -------------------------------------------- 2003 $720.50 -------------------------------------------- 2004 $630.44 -------------------------------------------- 2005 $540.38 -------------------------------------------- 2006 $450.31 -------------------------------------------- 2007 $360.25 -------------------------------------------- 2008 $270.19 -------------------------------------------- 2009 $180.13 -------------------------------------------- 2010 $90.06 -------------------------------------------- 2011 0 --------------------------------------------
ADMINISTRATIVE SURRENDER CHARGE TABLE
-------------------------------------------------------------- ADMINISTRATIVE SURRENDER SEGMENT CHARGE PER THOUSAND OF ISSUE AGE STATED DEATH BENEFIT -------------------------------------------------------------- -------------------------------------------------------------- 0 - 39 $2.50 -------------------------------------------------------------- 40 - 49 $3.50 -------------------------------------------------------------- 50 - 59 $4.50 -------------------------------------------------------------- 60 - 69 $5.50 -------------------------------------------------------------- 70 and above $6.50 --------------------------------------------------------------
This charge is reduced by 12.5% per year starting 7 Policy years after the segment's Effective Date until it reaches zero at the beginning of the 15th Policy year following that segment's Effective Date or the Policy year in which the Insured reaches age 98, whichever is earlier. Form 1197 (VUL) - 5/97 Page 5D SCHEDULE (CONTINUED) POLICYHOLDER TRANSACTION CHARGES Request for Sales Illustrations: $25 Premium Allocation Changes: $25 for each change over 5 per Policy year Excess Transfer Charge: See the Transfer Provisions section Partial Withdrawal Service Fee: See below POLICY LOANS Policy Loan Interest Rate: 3.75% per year Guaranteed Interest Rate Credited To Loan Division: 3.00% per year Minimum Loan Amount: $100 Maximum Loan Amount: See the Loan Provisions section. PARTIAL WITHDRAWALS Minimum Partial Withdrawal Amount: $100 Maximum Partial Withdrawal Amount: Amount which will leave $500 as the net Cash Surrender Value Partial Withdrawal Service Fee: The lesser of $25 or 2% of the amount withdrawn Limit On Partial Withdrawals: One per Policy year GUARANTEED INTEREST DIVISION Guaranteed Interest Rate For Guaranteed Interest 3.00% per year FORM 1197 (VUL) - 5/97 PAGE 5E SCHEDULE (CONTINUED) DEFINITION OF LIFE INSURANCE DEATH BENEFIT FACTORS
- --------------------------------------------------------------------------------------- ATTAINED FACTOR ATTAINED FACTOR ATTAINED FACTOR ATTAINED FACTOR AGE AGE AGE AGE - --------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------- 0-40 2.50 - --------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------- 41 2.43 56 1.46 71 1.13 86 1.05 - --------------------------------------------------------------------------------------- 42 2.36 57 1.42 72 1.11 87 1.05 - --------------------------------------------------------------------------------------- 43 2.29 58 1.38 73 1.09 88 1.05 - --------------------------------------------------------------------------------------- 44 2.22 59 1.34 74 1.07 89 1.05 - --------------------------------------------------------------------------------------- 45 2.15 - --------------------------------------------------------------------------------------- 60 1.30 75 1.05 90 1.05 - --------------------------------------------------------------------------------------- 46 2.09 61 1.28 76 1.05 91 1.04 -------------------------------------------------------------------------------------- 47 2.03 62 1.26 77 1.05 92 1.03 - --------------------------------------------------------------------------------------- 48 1.97 63 1.24 78 1.05 93 1.02 - --------------------------------------------------------------------------------------- 49 1.91 64 1.22 79 1.05 94 1.01 - --------------------------------------------------------------------------------------- 50 1.85 - --------------------------------------------------------------------------------------- 65 1.20 80 1.05 95 1.01 - --------------------------------------------------------------------------------------- 51 1.78 66 1.19 81 1.05 96 1.01 - --------------------------------------------------------------------------------------- 52 1.71 67 1.18 82 1.05 97 1.01 - --------------------------------------------------------------------------------------- 53 1.64 68 1.17 83 1.05 98 1.01 - --------------------------------------------------------------------------------------- 54 1.57 69 1.16 84 1.05 99 1.01 - --------------------------------------------------------------------------------------- 55 1.50 70 1.15 85 1.05 100 1.00 - --------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------
The Base Death Benefit at any time will be at least equal to your Account Value multiplied by the appropriate factor from this table. FORM 1197 (VUL) - 597 PAGE 5F TARGET DEATH BENEFIT SCHEDULE--TABLE OF TARGET DEATH BENEFITS
POLICY TARGET DEATH GUARANTEED POLICY TARGET GUARANTEED POLICY TARGET GUARANTEED YEAR BENEFIT* RATES YEAR DEATH RATES YEAR DEATH RATES BENEFIT* BENEFIT* - ------------------------------------------------------------------------------------------------------------------------------------ 1 $0.00 0.00000 25 $0.00 0.00000 49 $0.00 0.00000 2 $0.00 0.00000 26 $0.00 0.00000 50 $0.00 0.00000 3 $0.00 0.00000 27 $0.00 0.00000 51 $0.00 0.00000 4 $0.00 0.00000 28 $0.00 0.00000 52 $0.00 0.00000 5 $0.00 0.00000 29 $0.00 0.00000 53 $0.00 0.00000 - ------------------------------------------------------------------------------------------------------------------------------------ 6 $0.00 0.00000 30 $0.00 0.00000 54 $0.00 0.00000 7 $0.00 0.00000 31 $0.00 0.00000 55 $0.00 0.00000 8 $0.00 0.00000 32 $0.00 0.00000 56 $0.00 0.00000 9 $0.00 0.00000 33 $0.00 0.00000 57 $0.00 0.00000 10 $0.00 0.00000 34 $0.00 0.00000 58 $0.00 0.00000 - ------------------------------------------------------------------------------------------------------------------------------------ 11 $0.00 0.00000 35 $0.00 0.00000 59 $0.00 0.00000 12 $0.00 0.00000 36 $0.00 0.00000 60 $0.00 0.00000 13 $0.00 0.00000 37 $0.00 0.00000 61 $0.00 0.00000 14 $0.00 0.00000 38 $0.00 0.00000 62 $0.00 0.00000 15 $0.00 0.00000 39 $0.00 0.00000 63 $0.00 0.00000 - ------------------------------------------------------------------------------------------------------------------------------------ 16 $0.00 0.00000 40 $0.00 0.00000 64 $0.00 17 $0.00 0.00000 41 $0.00 0.00000 65 $0.00 18 $0.00 0.00000 42 $0.00 0.00000 66 $0.00 19 $0.00 0.00000 43 $0.00 0.00000 67 $0.00 20 $0.00 0.00000 44 $0.00 0.00000 68 $0.00 - ------------------------------------------------------------------------------------------------------------------------------------ 21 $0.00 0.00000 45 $0.00 0.00000 69 $0.00 22 $0.00 0.00000 46 $0.00 0.00000 70 $0.00 23 $0.00 0.00000 47 $0.00 0.00000 71 $0.00 24 $0.00 0.00000 48 $0.00 0.00000 72 $0.00 - ------------------------------------------------------------------------------------------------------------------------------------
The Adjustable Term Insurance Rider Death Benefit is the difference between the Target Death Benefit and the Base Death Benefit provided by the Policy. In no event will the Adjustable Term Insurance Rider Death Benefit be less than zero. Refer to your Adjustable Term Insurance Rider for more information. *The Target Death Benefit for the Policy under Death Benefit Option 2 equals the Target Death Benefit shown above plus the Policy Value. *The Target Death Benefit for the Policy under Death Benefit Option 3 equals the Target Death Benefit shown above plus the total Premiums paid to date less total partial withdrawals to date. The guaranteed rates shown FOR THE ADJUSTABLE TERM INSURANCE RIDER are for a standard rate class. If the Adjustable Term Rider is based on a special rate class (other than standard), the guaranteed rates will be adjusted using the rating factor shown in the Schedule for the special class. If the special rate class is a stated percentage increase, the guaranteed rates will be determined by multiplying the rates for a standard rate class shown above by the rating factor shown in the Schedule. If the special rate class is a flat amount per $1,000, the guaranteed rates will be determined by adding the flat amount per $1,000 shown in the Schedule to the rate per $1,000 for the standard rate class shown above. The rates shown above are based on the 1980 Commissioners' Standard Ordinary Mortality Table, age nearest birthday. Form 1197 (VUL) - 5/97 Page 5G SCHUDULE (CONTINUED) TABLE OF GUARANTEED RATES Guaranteed Maximum Cost of Insurance Rates Per $1000 (Basic Policy and Additional Insured Rider)
Attained Monthly Cost of Attained Monthly Cost of Attained Monthly Cost of Attained Monthly Cost of Age Insurance Rate Age Insurance Rate Age Insurance Rate Age Insurance Rate - ------------------------------------------------------------------------------------------------------------------------------------ 0 0.34900 26 0.12342 51 0.44693 76 5.59039 - ------------------------------------------------------------------------------------------------------------------------------------ 1 0.08921 27 0.12175 52 0.48965 77 6.17549 - ------------------------------------------------------------------------------------------------------------------------------------ 2 0.08254 28 0.12008 53 0.53742 78 6.78686 - ------------------------------------------------------------------------------------------------------------------------------------ 3 0.08170 29 0.12208 54 0.59276 79 7.44038 - ------------------------------------------------------------------------------------------------------------------------------------ 4 0.07920 30 0.12008 55 0.65401 80 8.16249 - ------------------------------------------------------------------------------------------------------------------------------------ 5 0.07503 31 0.12258 56 0.72203 81 8.97320 - ------------------------------------------------------------------------------------------------------------------------------------ 6 0.07169 32 0.12509 57 0.79429 82 9.89813 - ------------------------------------------------------------------------------------------------------------------------------------ 7 0.06869 33 0.12926 58 0.87251 83 10.95204 - ------------------------------------------------------------------------------------------------------------------------------------ 8 0.06338 34 0.13427 59 0.96090 84 12.11846 ----------------------------------------------------------------------------------------------------------------------------------- 9 0.06169 35 0.14094 60 1.05949 85 13.37460 ----------------------------------------------------------------------------------------------------------------------------------- 10 0.06085 36 0.14762 61 1.16916 86 14.69860 - ------------------------------------------------------------------------------------------------------------------------------------ 11 0.06419 37 0.15680 62 1.29417 87 16.08129 - ------------------------------------------------------------------------------------------------------------------------------------ 12 0.07086 38 0.16682 63 1.43714 88 17.49682 - ------------------------------------------------------------------------------------------------------------------------------------ 13 0.08254 39 0.17851 64 1.59899 89 18.96601 - ------------------------------------------------------------------------------------------------------------------------------------ 14 0.09588 40 0.19103 65 1.77812 90 20.51212 - ------------------------------------------------------------------------------------------------------------------------------------ 15 0.10756 41 0.20607 66 1.97123 91 22.16549 - ------------------------------------------------------------------------------------------------------------------------------------ 16 0.11924 42 0.22110 67 2.18097 92 23.98724 - ------------------------------------------------------------------------------------------------------------------------------------ 17 0.12842 43 0.23865 68 2.40660 93 26.06643 - ------------------------------------------------------------------------------------------------------------------------------------ 18 0.13343 44 0.25619 69 2.65338 94 28.78427 - ------------------------------------------------------------------------------------------------------------------------------------ 19 0.13844 45 0.27709 70 2.93268 95 32.81758 - ------------------------------------------------------------------------------------------------------------------------------------ 20 0.14011 46 0.29966 71 3.30181 96 39.64294 - ------------------------------------------------------------------------------------------------------------------------------------ 21 0.13927 47 0.32391 72 3.61779 97 53.06605 - ------------------------------------------------------------------------------------------------------------------------------------ 22 0.13677 48 0.34984 73 4.04199 98 83.33333 - ------------------------------------------------------------------------------------------------------------------------------------ 23 0.13427 49 0.37912 74 4.52073 99 83.33333 - ------------------------------------------------------------------------------------------------------------------------------------ 24 0.13093 50 0.41009 75 5.03724 - ------------------------------------------------------------------------------------------------------------------------------------ 25 0.12675 - ------------------------------------------------------------------------------------------------------------------------------------
The rates shown are for a standard rate class. If the Policy is based on a special rate class (other than standard), the maximum cost of insurance rates will be adjusted using the rating factor shown in the Schedule for the special class. If the special rate class is a stated percentage increase, the maximum cost of insurance rates will be determined by multiplying the rates for a standard rate class shown above by the rating factor shown in the Schedule. If the special rate class is a flat amount per $1,000, the maximum cost of insurance rates will be determined by adding the flat amount per $1,000 shown in the Schedule to the rate per $1,000 for the standard rate class shown above. The rates shown above are based on the 1980 Commissioners Standard Ordinary Mortality Table, age nearest birthday. Form 1197 (VUL) - 5/97 Page 5H DEFINITION OF TERMS ACCOUNT VALUE--The sum of the amounts allocated to the Divisions of the Variable Account and to the Guaranteed Interest Division, as well as any amount set aside in the Loan Division to secure a Policy Loan. ACCUMULATION UNIT VALUE--The value of the Accumulation Units of each Division of the Variable Account. The Accumulation Unit Value is determined as of each Valuation Date. BASE DEATH BENEFIT--Initially this is the Stated Death Benefit under the Policy. The Base Death Benefit may be greater than the Stated Death Benefit depending on which death benefit option and which test for the Federal income tax law definition of life insurance you choose. CASH SURRENDER VALUE--The amount of your Account Value minus the Surrender Charge, if any. CUSTOMER SERVICE CENTER--Our administrative office at P.O. Box 173763, Denver, CO 80217-3763. DIVISION(S) OF THE VARIABLE ACCOUNT--The investment options available, each of which invests in shares of one of the Portfolios. GENERAL ACCOUNT--The account which contains all of our assets other than those held in the Variable Account or our other separate accounts. GUARANTEED INTEREST DIVISION--Part of our General Account to which a portion of the Account Value may be allocated and which provides guarantees of principal and interest. INVESTMENT DATE--The date on which the initial Net Premium we receive will be allocated to your Policy. We will not allocate funds to your Policy until we receive at least one quarter of the Minimum Annual Premium as shown in the Schedule attached to your Policy and we have approved your Policy for issue. LOAN DIVISION--Part of our General Account in which funds are set aside to secure any outstanding Policy Loan and accrued loan interest when due. MATURITY DATE--The date the Policy matures. This is the Policy anniversary on which the Insured's Age is 100. MONTHLY PROCESSING DATE--The date each month on which the monthly deductions from the Account Value are due. The first Monthly Processing Date will be the Policy Date or the Investment Date, if later. Subsequent Monthly Processing Dates will be the same date as the Policy Date each month unless this is not a Valuation Date, in which case the Monthly Processing Date occurs on the next Valuation Date. NET ACCOUNT VALUE--The amount of the Account Value minus any Policy Loan and accrued loan interest. NET CASH SURRENDER VALUE--The amount of the Cash Surrender Value minus any Policy Loan and accrued loan interest. NET PREMIUM--Premium amounts paid less the sales and tax charges. These charges are deducted from the premiums before the premium is applied to your Account Value. PARTIAL WITHDRAWAL--The withdrawal of a portion of your Net Cash Surrender Value from the Policy. The Partial Withdrawal may cause you to incur a Surrender Charge, and it may reduce the amount of Death Proceeds in force. POLICY LOAN--The sum of amounts you have borrowed from your Policy, increased by any Policy Loan interest capitalized when due, and reduced by any Policy Loan repayments. RIGHT TO EXAMINE POLICY PERIOD--The period of time within which the Owner may examine the Policy and return it for a refund. SCHEDULED PREMIUM--The premium amount which you specify on the application as the amount you intend to pay at fixed intervals over a specified period of time. We will send you premium reminder notices for the amount of the Scheduled Premium on a quarterly, semiannual, or annual basis, as you determine; you need not pay the Scheduled Premium, and you may change it at any time. Also, within limits, you may pay less or more than the Scheduled Premium. STATED DEATH BENEFIT--The initial amount of Base Death Benefit under the Policy. The Stated Death Benefit amount will not vary unless you change it. SURRENDER CHARGE--The charge made against your Account Value in the event of surrender, Policy lapse, requested reductions in the Stated Death Benefit, or certain Partial Withdrawals. The Surrender Charge consists of the administrative Surrender Charge and the sales Surrender Charge. VALUATION PERIOD--The period which begins at 4:00 p.m. Eastern Time on a Valuation Date and ends at 4:00 p.m. Eastern Time on the next succeeding Valuation Date. Form 1197 (VUL) - MA - 5/97 Page 6 INSURANCE COVERAGE PROVISIONS INITIAL PREMIUM ALLOCATION We will not allocate funds to your Policy until we receive at least one quarter of the Minimum Annual Premium. The Minimum Annual Premium is listed in the Schedule. The Valuation Date on which we receive this amount and have approved your Policy for issue is the Investment Date. As of the Investment Date, the amount you have asked to be invested in the Divisions of the Variable Account will be allocated to the Fidelity Investments Money Market Division. Any amount you have designated for allocation to the Guaranteed Interest Division will be allocated to that Division. The amount allocated to the Fidelity Investments Money Market Division will remain there until the end of the Right to Examine Policy Period, at which time the balance will be transferred to the other Divisions of the Variable Account according to the allocations shown in the Schedule. VALUATION DATE A Valuation Date is any day: a) The New York Stock Exchange ("NYSE") is open for trading and on which Security Life's Customer Service Center is open for business; or b) As may be required by law. VALUATION PERIOD A Valuation Period begins at 4 p.m. Eastern time on a Valuation Date and ends at 4 p.m. Eastern time on the next succeeding Valuation Date. All Policy processing for a Valuation Period takes place as of the end of the Valuation Period. EFFECTIVE DATE OF COVERAGE The Policy date shown in the Schedule is the Effective Date for all coverage provided in the original application. The Effective Date is subject to the payment of at least one quarter of the Minimum Annual Premium and the acceptance of the Policy by you during the continued insurability of all persons insured by this Policy and any riders attached. The Policy date is the date from which we measure Policy years and determine the Monthly Processing Date. The first Monthly Processing Date is the Investment Date. Future Monthly Processing Dates are the same calendar day of each month as the Policy date unless this is not a Valuation Date in which case the Monthly Processing Date occurs on the next Valuation Date. A Policy anniversary occurs each year on the same month and day as the Policy date unless this is not a Valuation Date in which case the Policy anniversary occurs on the next Valuation Date. If the Policy date is February 29th, the Policy anniversary will be February 28th in years in which there is not a February 29th. The Effective Date for increases and additional benefits is shown in the Schedule. PAYOUT OF PROCEEDS The Payout of Proceeds is the amount we will pay: a) as of the Maturity Date, b) upon surrender of the Policy before the Maturity Date, or c) upon the death of the Insured before the Maturity Date. Form 1197 (VUL)-5/97 Page 7 The Payout of Proceeds as of the Maturity Date will be your net Account Value. The Payout of Proceeds upon surrender of this Policy prior to the Maturity Date will be the net Cash Surrender Value. The Maturity Date is the Policy anniversary on which the Insured's Age is 100. The Insured's Age is the Age listed in the Schedule increased by the number of completed Policy years since the Policy date. The Payout of Proceeds upon the death of the Insured will be the Base Death Benefit; plus any amounts payable from any additional benefits provided by rider; minus any outstanding Policy Loan including accrued but unpaid interest; minus any unpaid monthly deductions incurred prior to the date of death. We will determine the amount of proceeds payable upon the death of the Insured when we have received due proof of death and any other information which is necessary to process the claim. Any proceeds we pay are subject to adjustments as provided in the Misstatement of Age or Sex, Suicide Exclusion and Incontestability provisions. We will pay Proceeds in one sum unless you request an alternate form of payment. There are many possible methods of payment. The available Payout Options are described in the Payouts Other Than As One Sum provision. Contact us or your agent for additional information. Interest will be paid on the one sum death Proceeds from the date we determine the death Proceeds to the date of payment, or until a Payout Option is selected. Interest will be at the rate we declare, or at any higher rate required by law. BASE DEATH BENEFIT The total Stated Death Benefit is the sum of the Stated Death Benefit for all coverage segments. The Stated Death Benefit for each coverage segment and the death benefit option are shown in the Schedule. The Base Death Benefit is determined by the death benefit option which you select as follows: Option 1 The Base Death Benefit equals the total Stated Death Benefit Option 2 The Base Death Benefit equals the total Stated Death Benefit, plus your Account Value. Option 3 The Base Death Benefit equals the total Stated Death Benefit, plus the sum of Premiums paid minus Partial Withdrawals taken. The Base Death Benefit at any time will be at least equal to your Account Value multiplied by the appropriate factor from the Definition of Life Insurance Factors table as shown in the Schedule. This Policy is designed to qualify as a life insurance contract under the Internal Revenue Code. All terms and provisions of the Policy shall be construed in a manner consistent with that design. The amount of insurance in force at any time shall not be less than the amount of insurance necessary to achieve such qualification under the applicable provisions of the Internal Revenue Code in existence at the time the Policy is issued. We reserve the right to amend the Policy or adjust the amount of insurance when required. We will send you a copy of any Policy amendment. CHANGE IN REQUESTED INSURANCE COVERAGE At least 30 days prior to a Policy anniversary, you may request that the insurance coverage be increased or decreased. You may not increase coverage after the Insured is Age 86. You may change the coverage only once each Policy year on the Policy anniversary. The change in coverage may not be for an amount less than $1,000. The Effective Date of the change will be the Policy anniversary next following the date the written application is approved by us. After any change to the Stated Death Benefit, you will receive a new Schedule which will include the Stated Death Benefit, the benefit under any riders, if applicable, the Guaranteed Cost of Insurance rates, the Guideline Annual Premium, the new Target Premium and the new Surrender Charge. Form 1197 (VUL)-5/97 Page 8 REQUESTED INCREASES IN COVERAGE At least 30 days prior to a Policy anniversary, you may request an increase in the Stated Death Benefit. An increase will become effective as of the Policy anniversary after we have approved your application for increase. You must provide evidence satisfactory to us that the Insured is insurable according to our normal rules of underwriting for this type of Policy. This evidence will include an application and may include required medical information. An increase will consist of a new coverage segment of Stated Death Benefit subject to our limits. You will have the right to cancel an increase in the death benefit within the later of: a) 45 days after you sign the application for the increase, b) 20 days after you have received the new Schedule, or c) 10 days after we mail you the Notice of Withdrawal Right. The new Schedule will be deemed to have been received by you 15 days after it is mailed from our Customer Service Center. You may cancel an increase by sending notice in a form acceptable to us to our Customer Service Center. During this period, we will allocate the Premiums you pay related to the increase to the Fidelity Investments Money Market Division of the Variable Account. At the end of this period, the amount of the Premium remaining in the Fidelity Investments Money Market Division will be transferred to the Division of the Variable Account according to your most recent written allocation instruction. If you cancel an increase we will refund to you any charges attributable to the increase. An increase in the Stated Death Benefit will result in a new Sales Load. Premium allocated to an increase in coverage will be subject to a new Sales Load. REQUESTED DECREASES IN COVERAGE At least 30 days prior to a Policy anniversary, you may request a decrease in the Stated Death Benefit. A decrease will be effective as of the Policy anniversary. You may decrease the Stated Death Benefit if the Effective Date of the decrease will occur after the later of 2 years from the Policy date or 2 years after the most recent increase was made. A requested decrease will first reduce Adjustable Term Insurance Rider coverage segments, if any are attached to your Policy, beginning with the most recently added, and will then reduce each of the Stated Death Benefit segments in the same proportion as the total Stated Death Benefit is reduced. A Surrender Charge will apply if the Stated Death Benefit is decreased and the decrease occurs during the 14 years following the Policy date or the date of the prior increase. If a Surrender Charge applies, it will be deducted from your Account Value and future Surrender Charges will be reduced. The sum of the Stated Death Benefit for all coverage segments after any change may not be less than the minimum Stated Death Benefit shown in the Schedule. DEATH BENEFIT OPTION CHANGES At least 30 days prior to a Policy anniversary, you may request a change to the death benefit option. This change will be effective as of the Policy anniversary. A death benefit option change applies to the entire Stated Death Benefit. For us to approve a change to the death benefit option from Option 1 to Option 2, or from Option 1 to Option 3, you must submit evidence to us that the Insured is insurable according to our normal rules of underwriting for that class of policy. We may not allow any change if it would reduce the Stated Death Benefit below the minimum we require to issue this Policy at the time of reduction. After the Effective Date of the change, the Stated Death Benefit will be changed according to the following table: Form 1197 (VUL)-5/97 Page 9
OPTION CHANGE FROM TO STATED DEATH BENEFIT FOLLOWING CHANGE EQUALS: Option 1 Option 2 Stated Death Benefit prior to such change minus your Account Value as of the Effective Date of the change. Option 2 Option 1 Stated Death Benefit prior to such change plus your Account Value as of the Effective Date of the change. Option 1 Option 3 Stated Death Benefit prior to such change minus the sum of the Premiums paid minus Partial Withdrawals taken as of the Effective Date of the change. Option 3 Option 1 Stated Death Benefit prior to such change plus the sum of the Premiums paid minus Partial Withdrawals taken as of the Effective Date of the change. Option 2 Option 3 Stated Death Benefit prior to such change plus i) your Account Value as of the Effective Date of the change, minus ii) the sum of the Premiums paid minus Partial Withdrawals taken as of the Effective Date of the change. Option 3 Option 2 Stated Death Benefit prior to such change plus i) the sum of the Premiums paid minus Partial Withdrawals taken as of the Effective Date of the change, minus ii) your Account Value as of the Effective Date of the change.
For purposes of death benefit option changes, your Account Value will be allocated to each coverage segment in the same proportion that the Stated Death Benefit of that segment bears to the sum of all Stated Death Benefit segments as of the Effective Date of the change. PREMIUM PROVISIONS PLANNED PREMIUMS The Planned Premium as shown in the Schedule may be paid while this Policy is in force during the Insured's lifetime. You may increase or decrease the amount of the Planned Premium, subject to limits we may set and provisions in the Premium Limitation Section. Under conditions provided in the Grace Period provision and the Three Year Continuation Period, you may be required to make Premium payments to keep the Policy in force. We will send reminder notices to you for the Planned Premium amount and frequency that you have selected. You may select to receive notices either annually, semiannually or quarterly. You may also arrange for payment of Premiums on a monthly basis through an authorized special payment facility. All payment modes are subject to our minimum requirements for the payment mode selected. UNPLANNED PREMIUMS You may make unplanned Premium payments at any time the Policy is in force during the Insured's lifetime. The unplanned Premium payment must be at least $100. We may change this minimum if we give you 90 days written notice. Unless you tell us otherwise, these Premium payments will first be applied to reduce or pay off any existing Policy Loan and, as such, Premium Expense Charges will not be deducted. We may limit the amount of such unplanned Premium payments if the payment would result in an increase in the Base Death Benefit. If the net amount at risk is increase as a result of an unplanned Premium, we will require evidence of insurability satisfactory to us that the Insured is insurable according to our normal rules of underwriting for this type of Policy. The net amount at risk is the difference between the Base Death Benefit and your Account Value. Form 1197 (VUL)-5/97 Page 10 PREMIUM LIMITATION If the Definition of Life insurance test used for your Policy is the Guideline Premium Test, we will not accept any Premium that causes your Policy not to qualify as a life insurance policy under the Internal Revenue Code. PREMIUM ALLOCATION During the Right to Examine Policy Period, the portion of your Net Premium which you have elected to invest in a Division of the Variable Account will be invested in the Fidelity Investments Money Market Division. After the Right to Examine Policy Period, the balance of your funds in the Fidelity Investments Money Market Division will be reallocated as you directed in your Premium allocation shown in the Schedule. After the Right to Examine Policy Period, each Net Premium will be allocated to the Divisions of the Variable Account and the Guaranteed Interest Division as you directed in the application or as otherwise requested. You may change the allocation for subsequent Premiums by sending us written notice at our Customer Service Center. If you change your Premium allocation more than 5 times per Policy year, we will deduct a charge from the Divisions of the Variable Account and the Guaranteed Interest Division in the same proportion that your Account Value of each Division bears to your net Account Value. The amount of this charge is shown in the Schedule. Premium allocation percentages may be in any whole number from 1% to 100% provided that at least $100 is allocated to each Division selected. VARIABLE ACCOUNT PROVISIONS THE VARIABLE ACCOUNT The Variable Account is an account established by us, pursuant to the laws of the State of Colorado, to separate the assets funding the benefits for the class of policies to which this Policy belongs from the other assets of Security Life of Denver. The Variable Account is registered as a unit investment trust under the Investment Company Act of 1940. All income, gains and losses, whether or not realized, from assets allocated to the Variable Account are credited to or charged against the Variable Account without regard to income, gains or losses of our General Account. The assets of the Variable Account are our property but are separate from our General Account and our other Variable Accounts. That portion of the assets of the Variable Account which is equal to the reserves and other Policy liabilities with respect to the Variable Account is not subject to creditor claims against us. VARIABLE ACCOUNT DIVISIONS The Variable Account is divided into Divisions, each of which invests in a series fund Portfolio designed to meet the objectives of the Division. The current eligible Divisions are shown in the Schedule. We may, from time to time, add additional Divisions. If we do, you may be permitted to select from these other Divisions subject to the terms and conditions we may impose on those allocations. We reserve the right to limit the number of Divisions in which you may invest. Form 1197 (VUL)-5/97 Page 11 CHANGES WITHIN THE VARIABLE ACCOUNT When permitted by law, and subject to any required notice to you and approval of the Securities and Exchange Commission ("SEC"), state regulatory authorities or Policy Owners, we may from time to time make the following changes to the Variable Account: . Make additional Divisions available. These Divisions will invest in investment Portfolios we find suitable for the Policy. . Eliminate Divisions from the Variable Account, combine 2 or more Divisions, or substitute a new Portfolio for the Portfolio in which a Division invests. A substitution may become necessary if, in our judgment, a Portfolio no longer suits the purposes of the Policy. This may happen due to a change in laws or regulations, or a change in a Portfolio's investment objectives or restrictions. This may also happen if the Portfolio is no longer available for investment, or for some other reason, such as a declining asset base. . Transfer assets of the Variable Account, which we determine to be associated with the class of Policies to which your Policy belongs, to another Variable Account. . Withdraw the Variable Account from registration under the Investment Company Act of 1940. . Operate the Variable Account as a management investment company under the Investment Company Act of 1940. . Cause one or more Divisions to invest in a mutual fund other than or in addition to the Portfolios. . Discontinue the sale of Policies and certificates. . Terminate any employer or plan trustee agreement with us pursuant to its terms. . Restrict or eliminate any voting rights as to the Variable Account. . Make any changes required by the Investment Company Act of 1940 or the rules or regulations thereunder. No such changes will be made without any necessary approval of the SEC and applicable state insurance departments. Owners will be notified of any changes. If you then wish to transfer the amount you have in that Division to another Division of the Variable Account or to the Guaranteed Interest Division, you may do so, without charge, by notifying us. At the same time, you may also change how your Net Premiums and deductions are allocated. Form 1197 (VUL)-MA- 5/97 Page 12 GENERAL ACCOUNT PROVISIONS THE GENERAL ACCOUNT The General Account holds all of our assets other than those held in the Variable Account or our other separate accounts. The Guaranteed Interest Division is a part of our General Account. GUARANTEED INTEREST DIVISION The Guaranteed Interest Division is another Division to which you may allocate Premiums or make transfers. The Account Value of the Guaranteed Interest Division is equal to the Net Premium allocated to this Division plus any earned interest minus deductions taken from this Division. Interest is credited at the guaranteed rate shown in the schedule or may be credited at a higher rate. Any higher rate is guaranteed to be in effect for at least 12 months. LOAN DIVISION The Loan Division is the account which is set aside to secure the Policy Loan, if any. See the Loan Provision section for information. TRANSFER PROVISIONS After the Right to Examine Policy Period, your Account Value in each Division may be transferred to any other Division of the Variable Account upon written request. Transfers from the Guaranteed Interest Division are subject to the limitations as described in the Guaranteed Interest Division provision. The number of free transfers permitted in any one Policy year without an Excess Transfer Charge, the total number of transfers permitted and the Excess Transfer Charge are shown in the table below. Any transfers made due to the operation of the Automatic Rebalancing Feature or Dollar Cost Averaging will not count toward the transfers allowed free of charge. The minimum amount that may be transferred from each Division is the lesser of $100 or the balance of a Division. The following table summarizes the number of transfers available and the associated charges during any Policy year. - ------------------------------------------------------------------------------- FREE TRANSFERS 12 - ------------------------------------------------------------------------------- TOTAL NUMBER OF TRANSFERS PERMITTED Unlimited - ------------------------------------------------------------------------------- EXCESS TRANSFER CHARGE $25 for each transfer in excess of 12 during any Policy year. - -------------------------------------------------------------------------------
TRANSFERS TO OR FROM THE GUARANTEED INTEREST DIVISION Once during the first 30 days of each Policy year, you may transfer amounts from the Guaranteed Interest Division. Transfer requests received within 30 days prior to the Policy anniversary will be deemed to occur as of the Policy anniversary. Transfer requests received on the Policy anniversary or within the following 30 days will be processed; transfer requests received at any other time will not be processed. Transfers of your Account Value to the Guaranteed Interest Division are not limited to this 30-day period. The maximum transfer amount from the Guaranteed Interest Division in any Policy year is the greatest of: Form 1197 (VUL)-5/97 Page 13 a) 25% of your Account Value in the Guaranteed Interest Division at the time of the first transfer or withdrawal in a Policy year; b) The minimum transfer amount; or c) The sum of the amounts transferred and withdrawn from the Guaranteed Interest Division in the prior Policy year. For purposes of calculating the maximum transfer from the Guaranteed Interest Division, all Partial Withdrawals and transfers from the Guaranteed Interest Division in a Policy year are summed. EXCESS TRANSFER CHARGE If you exceed the number of free transfers allowed, you will be assessed an Excess Transfer Charge. This charge will be deducted from each of the Divisions in which you are invested in the same proportion that the amount of Account Value in that Division bears to the net Account Value immediately after the transfer. DOLLAR COST AVERAGING If you have at least $10,000 of Account Value in either the Fidelity Investments Money Market Division or the Neuberger & Berman Limited Maturity Bond Division, you may choose to transfer a specified dollar amount each month from one of these Divisions to other Divisions of the Variable Account. Dollar Cost Averaging transfers may not be made to the Guaranteed Interest Division. The minimum amount that you may elect to transfer each month is $100. The maximum amount that you may transfer is equal to your Account Value in the Division from which the transfer is taken when the election is made, divided by 12. Dollar Cost Averaging may be elected to end on a specified date or when a specific balance remains in the Fidelity Investments Money Market Division or the Neuberger & Berman Limited Maturity Bond Division. Percentage allocations of the transfer amount must be designated as whole number percentages; no specific dollar designation may be made to the Divisions of the Variable Account. If you elect to transfer to a particular Division, the minimum percentage that may be transferred to that Division is 1% of the total amount transferred provided that the allocation is at least $100. The transfer date will be the same calendar day each month as the Monthly Processing Date. If this calendar day is not a Valuation Date, the next Valuation Date will be used. If, on any transfer date, your Account Value in the chosen Division is equal to or less than the amount you have elected to have transferred, the entire amount will be transferred, and this option will end. Dollar Cost Averaging may not begin until the Monthly Processing Date following the end of the Right to Examine Policy Period. You may change the transfer amount or the Divisions to which transfers are to be made once each Policy year. You may cancel this election by sending us written notice at our Customer Service Center at least 7 days before the next transfer date. Any transfer under this option will not be included for purposes of the Excess Transfer Charge. If you elect both Dollar Cost Averaging and Automatic Rebalancing, Dollar Cost Averaging will occur first. On the first Valuation Date of the next calendar quarter after Dollar Cost Averaging has terminated, Automatic Rebalancing will begin. Form 1197(VUL)-5/97 Page 14 AUTOMATIC REBALANCING Automatic Rebalancing allows you to match your Account Value in each Division to your allocation percentage for new Premiums. Automatic Rebalancing can be elected in your application or by completing the Automatic Rebalancing form and returning it to our Customer Service Center. As of the first Valuation Date of each calendar quarter thereafter we will reallocate your net Account Value so that the amount in each Division matches your Premium allocation. Automatic Rebalancing may not begin until the end of the Right to Examine Policy Period. While this feature is in effect, we require that you allocate no more than 35% of your Premiums to any one Division, and you must allocate your Premiums to at least 5 Divisions. If at any time during the operation of the Automatic Rebalancing feature you request a change in Premium allocation which does not meet these requirements, we will notify you that your allocation must be changed. We will not process such a request unless you also request that the Automatic Rebalancing feature be discontinued. When you request a change in Premium allocation that meets these requirements, your net Account Value will be reallocated as of the Valuation Date that we receive your written allocation instructions. Amounts will be transferred among the Divisions to match the allocation for new Premiums. During the operation of Automatic Rebalancing, you may not change your allocation percentage to the Guaranteed Interest Division by more than 25% of the percentage previously allocated to the Guaranteed Interest Division. If you change your Premium allocation more than five times per Policy year, there will be a $25 charge taken from your Account Value. This charge will be deducted from each of the Divisions of the Variable Account and the Guaranteed Interest Division in the same proportion that your Account Value of each Division bears to your net Account Value as of the Valuation Date the allocation change is effective. Any transfer as a result of the operation of Automatic Rebalancing will not be included in determining if the Excess Transfer Charge will apply. You may not transfer among Divisions while the Automatic Rebalancing feature is in effect. If you elect both Dollar Cost Averaging and Automatic Rebalancing, Dollar Cost Averaging will occur first. On the first Valuation Date of the next calendar quarter after Dollar Cost Averaging has terminated, Automatic Rebalancing will begin. ACCOUNT VALUE PROVISIONS The Account Value is the sum of the current amounts allocated to the Divisions of the Variable Account and to the Guaranteed Interest Division plus your balance in the Loan Division. The Account Value is based on the amount and number of Premiums paid, Policy and rider charges assessed, loans and withdrawals taken, monthly deductions, Premium Expense Charges, transaction charges, any Surrender Charges, and the investment experience or credited interest of the Division to which your Account Value is allocated. Your net Account Value is equal to your Account Value minus any Policy Loan and accrued but unpaid loan interest. Form 1197 (VUL)-5/97 Page 15 NET PREMIUM The Net Premium equals the Premium paid minus the Premium Expense Charges for taxes and the appropriate Sales Load shown in the Schedule. Premiums allocated to an increase in coverage will be subject to a new Sales Load. Premiums are allocated in the same proportion that the Guideline Annual Premium of each segment bears to the sum of the Guideline Annual Premiums of all segments. The Guideline Annual Premium for each coverage segment is shown in the Schedule. ACCOUNT VALUES ON THE INVESTMENT DATE The Account Value of each Division of the Variable Account and the Guaranteed Interest Division as of the Investment Date is equal to: a) The allocation to that Division of the first Net Premium paid (as determined by you); minus b) The portion of any monthly deductions due on the Investment Date allocated to that Division. The Account Value of the Loan Division as of the Investment Date is equal to zero. ACCUMULATION UNIT VALUE The investment experience of a Division of the Variable Account is determined as of each Valuation Date. We use an Accumulation Unit Value to measure the experience of each of the Variable Account Divisions during a Valuation Period. We set the Accumulation Unit Value at $10 on the Valuation Date when the first investments in each Division of the Variable Account are made. The Accumulation Unit Value for a Valuation Period equals the Accumulation Unit Value for the preceding Valuation Period multiplied by the Accumulation Experience Factor for the Valuation Period. The number of units for a given transaction related to a Division of the Variable Account as of a Valuation Date is determined by dividing the dollar value of that transaction by that Division's Accumulation Unit Value for that date. ACCUMULATION EXPERIENCE FACTOR For each Division of the Variable Account, the Accumulation Experience Factor reflects the investment experience of the Portfolio in which that Division invests and the charges assessed against that Division for a Valuation Period. The Accumulation Experience Factor is calculated as follows: a) The net asset value of the Portfolio in which that Division invests as of the end of the current Valuation Period; plus b) The amount of any dividend or capital gains distribution declared and reinvested in the Portfolio in which that Division invests during the current Valuation Period; minus c) A charge for taxes, if any. d) The result of (a), (b) and (c) divided by the net asset value of the Portfolio in which that Division invests as of the end of the preceding Valuation Period; minus e) The daily equivalent of the Annual Mortality and Expense Risk Charge shown in the Schedule for each day in the current Valuation Period. Form 1197 (VUL)-5/97 Page 16 ACCOUNT VALUE OF THE DIVISIONS OF THE VARIABLE ACCOUNT On subsequent Valuation Dates after the Investment Date, your Account Value of each Division of the Variable Account is calculated as follows: a) The number of Accumulation Units in that Division as of the beginning of the current Valuation Period multiplied by that Division's Accumulation Unit Value for the current Valuation Period; plus b) Any additional Net Premiums allocated to that Division during the current Valuation Period; plus c) Any Account Value transferred to or minus any Account Value transferred from the Variable Division during the current Valuation Period (including the applicable portion of any transfer fee); minus d) Any Partial Withdrawals allocated to that Division and any applicable withdrawal service fees which are allocated to the Variable Division during the current Valuation Period; plus e) Any amounts released from the Loan Division as a result of a loan or loan interest payment, or minus amounts transferred to the Loan Division as of a result of any loans which are allocated to the Variable Division during the current Valuation Period; minus f) The portion of any Surrender Charge resulting from a decrease in Stated Death Benefit allocated to the Division; minus g) The portion of the monthly deduction allocated to the Variable Division, if a Monthly Processing Date occurs during the current Valuation Period. ACCOUNT VALUE OF THE GUARANTEED INTEREST DIVISION On Valuation Dates after the Investment Date, your Account Value of the Guaranteed Interest Division is calculated as follows: a) The Account Value of the Guaranteed Interest Division at the end of the preceding Valuation Period plus interest at the declared rate credited during the current Valuation Period; plus b) Any additional Net Premiums allocated to the Guaranteed Interest Division plus interest credited to these Premiums during the current Valuation Period; plus c) Any Account Value transferred to or minus any Account Value transferred from the Guaranteed Interest Division during the current Valuation Period (including the applicable portion of any transfer fee); minus d) Any Partial Withdrawals taken and any applicable withdrawal service fees which are allocated to the Guaranteed Interest Division during the current Valuation Period; plus e) Any amounts released from the Loan Division as a result of a loan or loan interest payment, or minus amounts transferred to the Loan Division as a result of any loans which are allocated to the Guaranteed Interest Division during the current Valuation Period; minus f) The portion of any Surrender Charge resulting from a decrease in Stated Death Benefit allocated to the Guaranteed Interest Division, minus g) The portion of the monthly deduction allocated to the Division, if a Monthly Processing Date occurs during the current Valuation Period. ACCOUNT VALUE OF THE LOAN DIVISION On Valuation Dates after the Investment Date, your Account Value of the Loan Division is equal to: a) The Account Value of the Loan Division on the prior Valuation Date; plus b) Any interest credited to the Loan Division during the Valuation Period; plus c) An amount equal to any additional loans since the prior Valuation Date; minus d) Any loan repayments, including payment of loan interest in cash; plus e) The amount of accrued loan interest if the Valuation Date is a Policy anniversary; minus Form 1197 (VUL) - 5/97 Page 17 f) The amount of interest credited to the Loan Division during the year if the Valuation Date is a Policy anniversary. On Policy anniversaries, any amount of interest credited to the Loan Division during the year is transferred from the Loan Division to the Variable Account and Guaranteed Interest Divisions in the same proportion that your Account Value in each Variable Division and the Guaranteed Interest Division bears to your net Account Value as of the Policy anniversary. MONTHLY DEDUCTION AND REFUND MONTHLY DEDUCTION The monthly deduction is equal to: a) the cost of insurance charges for this Policy; plus b) the monthly charges for any other additional benefits provided by rider; plus c) the monthly expense charges shown in the Schedule. The monthly deductions allocated to the Divisions of the Variable Account and Guaranteed Interest Division in the same proportion that your Account Value in the Division bears to your net Account Value as of the Monthly Processing Date. This deduction is taken from your Account Value as of the Monthly Processing Date. COST OF INSURANCE The cost of insurance is determined on a monthly basis for each coverage segment. Such cost is the monthly cost of insurance rate for the Insured's Premium Class multiplied by the net amount at risk. The net amount at risk is (a) minus (b) where: a) is the Base Death Benefit for all coverage segments as of the Monthly Processing Date after the monthly deductions (other than cost of insurance charges for the Base Death Benefit, any Adjustable Term Insurance Rider and any Waiver of Monthly Deductions Rider), divided by 1 plus the monthly equivalent of the Guaranteed Interest Rate for the Guaranteed Interest Division as shown in the Schedule; and b) is your Account Value as of the Monthly Processing Date after the monthly deductions (other than the cost of insurance for the Base Death Benefit, any Adjustable Term Insurance Rider and any Waiver of Monthly Deduction Rider). The cost of insurance rates will be determined by us from time to time. They will be based on the sex and Age as of the Effective Date of coverage, the duration since the coverage began and the Premium Class. Any change in rates will apply to all individuals of the same Premium Class and whose policies have been in effect for the same length of time. The rates will never exceed those rates shown in the Table of Guaranteed Rates in the Schedule as adjusted for any special Premium Class. Each time there is a new coverage segment of Stated Death Benefit due to a requested increase, the net amount at risk will be allocated to each coverage segment in the same proportion that the Stated Death Benefit of that segment bears to the total Policy Stated Death Benefit. Different rates will apply to each segment depending upon the Premium Class, the Age as of the Effective Date of the increase and the duration since the Effective Date of the increase. Form 1197 (VUL) - 5/97 Page 18 PERSISTENCY REFUND Each month your Policy or a coverage segment of Stated Death Benefit remains in force after its tenth Policy anniversary, we will credit your Account Value with a refund equivalent to 0.5% of your Account Value on an annual basis for that segment (0.04167% monthly). Your Account Value will be allocated to each coverage segment based upon the number of completed Policy years the segment has been in force and the size of the Guideline Annual Premium for the segment as shown in the Schedule. The persistency refund will be added to the Divisions of the Variable Account and the Guaranteed Interest Division in the same proportion that your Account Value in each Division bears to your net Account Value as of the Monthly Processing Date. LOAN PROVISIONS POLICY LOANS You may obtain a Policy Loan after the first Policy anniversary. The maximum amount you may borrow at any time equals (a) minus (b) where (a) is equal to: 1. Account Value minus (12 times the current monthly deduction); 2. Multiplied by (1 + Policy Loan Interest Rate); 3. Divided by (1 + Guaranteed Interest Rate credited to Loan Division); and where (b) is equal to any outstanding Policy Loan and accrued loan interest. The Policy Loan is a first lien on your Policy. The minimum amount you may borrow is shown in the Schedule. The outstanding Policy Loan amount is equal to the loan amount as of the beginning of the Policy year plus new loans and minus loan repayments. LOAN INTEREST The annual Policy Loan interest rate is shown in the Schedule. If a loan is made, interest is due and payable at the end of the Policy year. Thereafter, interest on the loan amount is due annually at the end of each Policy year until the loan is repaid. If interest is not paid when due, it is added to the Policy Loan. If the Policy Loan amount and any accrued interest equals or exceeds the Cash Surrender Value, a Premium sufficient to keep this Policy in force must be paid as provided in the Grace Period Provision. LOAN DIVISION When a Policy Loan is taken or when interest is not paid in cash when due, an amount equal to the loan is transferred from the Divisions of the Variable Account and the Guaranteed Interest Division to the Loan Division to secure the loan. This amount will be deducted from the Divisions of the Variable Account and the Guaranteed Interest Division in the same proportion that your Account Value in each Division bears to your net Account Value as of the date the transfer is effective. Your Account Value in the Loan Division will be credited with interest at the interest rate for the Loan Division shown in the Schedule. Form 1197 (VUL) - 5/97 Page 19 When a loan repayment is made an amount equal to the repayment is transferred from the Loan Division to the Guaranteed Interest Division and the Divisions of the Variable Account in the same proportion as your current Premium allocation unless you request a different allocation. PARTIAL WITHDRAWAL PROVISIONS You may apply for a Partial Withdrawal of your Account Value on any Monthly Processing Date after the first Policy anniversary by writing to us at our Customer Service Center. The minimum and maximum Partial Withdrawal amounts are shown in the Schedule. When a Partial Withdrawal is made, the amount of the withdrawal plus a service fee is deducted from your Account Value. The amount of the service fee is shown in the Schedule. We limit the number of Partial Withdrawals in a Policy year and this number is shown in the Schedule. If the Stated Death Benefit is reduced by a Partial Withdrawal during the first 14 years following the Policy date or following an increase in the Stated Death Benefit, a Surrender Charge will be deducted from your Account Value. The Stated Death Benefit is not reduced by a Partial Withdrawal taken when the Base Death Benefit has been increased to qualify your Policy as life insurance under the Federal income tax laws and the amount withdrawn is no greater than that which reduces your Account Value to the level which no longer requires the Base Death Benefit to be increased for Federal income tax law purposes. For a Policy under an Option 1 death benefit, the Stated Death Benefit is not reduced by a Partial Withdrawal in the circumstances described above. In addition, if no more than 16 years have elapsed since the Policy date and the Insured is not yet Age 81, a Partial Withdrawal of an amount up to 10% of your Account Value or, if greater, 5% of the Stated Death Benefit, calculated immediately before the Partial Withdrawal is taken will not reduce the Stated Death Benefit. Any additional amount withdrawn reduces your Stated Death Benefit by that additional amount. For a Policy under an Option 2 death benefit, a Partial Withdrawal does not reduce your Stated Death Benefit. For a Policy under an Option 3 death benefit, your Stated Death Benefit will be reduced by any amount of the Partial Withdrawal in excess of Premiums paid to the date of the Partial Withdrawal. Any reduction in death benefit or Account Value will occur as of the date the Partial Withdrawal occurs. No Partial Withdrawal will be allowed if the Stated Death Benefit remaining in force after any such Partial Withdrawal would be reduced below the minimum Stated Death Benefit shown in the Schedule. For a Policy under an Option 2 or Option 3 death benefit, a Partial Withdrawal reduces the Base Death Benefit by the amount of the withdrawal. Under any death benefit option, if the Base Death Benefit has been increased in order to qualify your Policy as a life insurance contract under the Federal income tax laws, the Partial Withdrawal reduces the Base Death Benefit by an amount greater than the withdrawal. If the Stated Death Benefit is reduced during the first 7 years of a coverage segment, a new Target Premium will be calculated and future maximum Surrender Charges will be reduced. If the Stated Death Benefit is reduced after the first 7 years of a coverage segment, the Surrender Charge is reduced in the same proportion that the Stated Death Benefit is reduced. You may specify how much of the withdrawal you wish taken from each Division of the Variable Account or from the Guaranteed Interest Division. You may not withdraw from the Guaranteed Interest Division more than the total withdrawal times the ratio of your Account Value in the Guaranteed Interest Division to your net Account Value immediately prior to the withdrawal. Unless you indicate otherwise, we will make the withdrawal from the amounts in the Guaranteed Interest Division and the Divisions of the Variable Account in the same proportion that your Form 1197 (VUL) - 5/97 Page 20 Account Value in each Division bears to your net Account Value immediately prior to the withdrawal. The withdrawal service fee and any Surrender Charge deducted from your Account Value is deducted from each Variable Division and the Guaranteed Interest Division in the same proportion that your Account Value of each Division bears to your net Account Value immediately after the withdrawal. We may send you a new Schedule to reflect the effect of the withdrawal, including any change to the Stated Death Benefit and Surrender Charges. We may ask you to return your Policy to our Customer Service Center to make this change. The withdrawal and the reductions in death benefits will be effective as of the Valuation Date after we receive your request. SURRENDER PROVISIONS SURRENDER VALUE The net Cash Surrender Value on any date will be your Account Value minus any applicable Surrender Charge and minus any Policy Loan including accrued but unpaid loan interest. SURRENDER CHARGES A separate Surrender Charge will apply to each Stated Death Benefit coverage segment. The Surrender Charge for this Policy is the sum of the Surrender Charge for each coverage segment of Stated Death Benefit. The Surrender Charge will not exceed the total maximum Surrender Charge shown in the Schedule. For purposes of calculating the Surrender Charge for a coverage segment, Premiums are allocated to a segment in the same proportion that the Guideline Annual Premium of each segment bears to the sum of the Guideline Annual Premiums of all segments. The Guideline Annual Premium for each coverage segment is shown in the Schedule. For each segment, the Surrender Charge consists of an administrative Surrender Charge and a sales Surrender Charge. The administrative Surrender Charge for each segment is determined from the administrative Surrender Charge table in the Schedule. It depends on the segment's Issue Age, Effective Date and initial Stated Death Benefit which are in the Schedule. For the first 7 Policy years following the Effective Date of a segment, the sales Surrender Charge is the lesser of: 50% of the target Premium for the segment; or 25% of the sum of all Premiums paid up to the target Premium for the segment plus 5% of the sum of all Premiums paid in excess of the target Premium for the segment. Thereafter, the sales Surrender Charge for the segment decreases at the beginning of each year following the 7th Policy year from the Effective Date of the segment by 12.5% of the sales Surrender Charge in effect at the end of the 7th Policy Year until it reaches zero at the beginning of the 15th Policy year following the segment's Effective Date or the Policy year the Insured reaches age 98, whichever is sooner. During the first 14 Policy years or within 14 years of the Effective Date of an increase in the Stated Death Benefit segment, if you request a decrease to the Stated Death Benefit or take a Partial Withdrawal which causes the Stated Death Benefit to decrease, the administrative Surrender Charge will decrease in the same proportion that the Stated Death Benefit decreases. Form 1197 (VUL) - 5/97 Page 21 Upon a decrease in the Stated Death Benefit, a portion of the Surrender Charge will be deducted from your Account Value. The amount of the Surrender Charge which will be deducted from your Account Value will equal the Surrender Charge in effect before the decrease minus the Surrender charge in effect after the decrease. If a decrease to the Stated Death Benefit occurs after the first 7 years of a coverage segment, the maximum Surrender Charges for the remaining Policy will be reduced by the percentage that the Stated Death Benefit is decreased. If a decrease occurs during the first 7 years of a coverage segment, the Target Premium will be recalculated; future maximum Surrender Charges for that coverage segment will be reduced. A Surrender Charge is not deducted from your Account Value if the Stated Death Benefit is decreased because the death benefit option is changed. BASIS OF COMPUTATIONS The Cash Surrender Value under the Policy is not less than the minimums required as of the Policy date by the state in which your Policy was delivered. A detailed statement of the method of computation of Policy values under the Policy has been filed with the insurance department of the state in which the Policy was delivered, if required. FULL SURRENDERS You may surrender your Policy after the Right to Examine Policy Period or at any time during the lifetime of the Insured and receive the net Cash Surrender Value. We will compute the net Cash Surrender Value as of the next Valuation Date after we receive both your request and the Policy at our Customer Service Center. This Policy will be canceled as of the date we receive your request, and there will be no further benefits under this Policy. GRACE PERIOD, TERMINATION AND REINSTATEMENT PROVISIONS GRACE PERIOD If the following three conditions occur on a Monthly Processing Date, the Policy will enter into the 61 day Grace Period: a) The net Cash Surrender Value is zero or less, and b) Three year continuation period described below has expired or the required Premium for the three year continuation period has not been paid. We will give you a 61 day Grace Period from this Monthly Processing Date to make the required Premium payment. The required Premium payment then due must be paid to keep the Policy in force. If this amount is not received in full by the end of the Grace Period, the Policy will lapse without value. The required Premium payment will be equal to past due charges plus an amount we expect to be sufficient to keep the Policy and any riders in force for 2 months following the receipt of the required Premium payment. If we receive at least the required Premium payment during the Grace Period we will make deductions from the Net Premium payment for the past due amounts and apply any remaining amount as Premium to the Policy. Notice of the amount of the required Premium payment will be mailed to you or any assignee at the last known address at least 30 days before the end of the Grace Period. If the Insured dies during the Grace Period, we will deduct any overdue monthly deductions from the death Proceeds of the Policy. Form 1197 (VUL) - MA - 5/97 Page 22 THREE YEAR CONTINUATION PERIOD During the first 3 Policy years, if at all times the sum of your Premiums paid minus the sum of your Partial Withdrawals, Policy Loans taken and accrued but unpaid interest, is greater than or equal to: one-twelfth of the Minimum Annual Premium multiplied by the number of complete months your Policy has been in force, your Policy will remain in force regardless of the net Cash Surrender Value. The Minimum Annual Premium is shown in the Schedule. If you increase the Stated Death Benefit during the first 3 Policy years, the new Schedule will show a revised Minimum Annual Premium which will be used for future tests to determine if your Policy will remain in force under this provision. TERMINATION All coverage provided by this Policy will end as of the earliest of: a) The date the Policy is surrendered; b) The date of death of the Insured; c) The Maturity Date of the Policy; or d) The date the Grace Period ends without payment of the required Premium. REINSTATEMENT The Policy may be reinstated within five years after the beginning of the Grace Period. The reinstatement will be effective as of the Monthly Processing Date on or next following the date we approve your written application. We will reinstate the Policy and any riders if the following conditions are met: a) You have not surrendered the Policy for its net Cash Surrender Value; b) You submit evidence satisfactory to us that the Insured and those insured under any riders are still insurable according to our normal rules of underwriting for this type of Policy; and c) We receive payment of the amount of Premium sufficient to keep the Policy and any riders in force from the beginning of the Grace Period to the end of the expired Grace Period and for 2 months after the date of reinstatement. We will let you know, at the time you request reinstatement, the amount of Premium needed for this purpose. The Surrender Charge as of the date of reinstatement will equal the Surrender Charge as of the beginning of the Grace Period. We will reinstate any Policy Loan, with accrued loan interest to the end of the Grace Period, which existed when coverage ended. Upon reinstatement, the Net Premium received minus past due amounts will be allocated to the Divisions of the Variable Account and the Guaranteed Interest Division according to the Premium allocation percentages in effect at the start of the Grace Period or as directed by you in writing at the time of reinstatement. Form 1197 (VUL) - 5/97 Page 23 DEFERRAL OF PAYMENT Requests for transfers, withdrawals, payment of proceeds on the Maturity Date or a full surrender will be processed within 7 days of receipt of the request in a form acceptable to us. However, we may postpone the processing of any such Variable Account transactions for any of the following reasons: a) The NYSE is closed, other than customary weekend and holiday closings. b) Trading on the NYSE is restricted by the SEC. c) The SEC declares that an emergency exists as a result of which disposal of securities in the Variable Account is not reasonably practicable to determine your Account Value in the Divisions. d) A governmental body having jurisdiction over the Variable Account by order permits such suspension. Rules and regulations of the SEC, if any, are applicable and will govern as to whether conditions described in (b), (c), or (d) exist. Death proceeds will be paid within 7 days of determination of the proceeds and are not subject to deferment. We may defer for up to 6 months payment of any surrender proceeds, withdrawal or loan amounts from the Guaranteed Interest Division. GENERAL POLICY PROVISIONS THE POLICY The Policy, including the original application and applications for an increase, riders, endorsements, any Schedule pages, and any reinstatement applications make up the entire contract between you and us. A copy of the original application will be attached to the Policy at issue. A copy of any application as well as a new Schedule will be attached or furnished to you for attachment to the Policy at the time of any change in coverage. In the absence of fraud, all statements made in any application will be considered representations and not warranties. No statement will be used to deny a claim unless it is in an application. AGE The Policy is issued at the Age shown in the Schedule. This is the Insured's Age nearest birthday on the Policy date. The Insured's Age at any time is the Age shown in the Schedule increased by the number of completed Policy years. PROCEDURES We must receive any election, designation, assignment or any other change request you make in writing, except those specified on the application. It must be in a form acceptable to us. We may require a return of the Policy for any change or for a full surrender. We are not liable for any action we take before we receive and record the written request at our Customer Service Center. In the event of the death of the Insured before the Maturity Date, please let us or our agent know as soon as possible. Claim procedure instructions will be sent to the Beneficiary immediately. We may require proof of Age and a certified copy of the death certificate. We may require the Beneficiary and next of kin to sign authorizations as part of due proof. These authorization forms allow us to obtain information about the Insured, including, but not limited to, medical records of physicians and hospitals used by the Insured. Form 1197 (VUL) - 5/97 Page 24 OWNERSHIP The original Owner is the person named as the Owner in the application. You, as the Owner, can exercise all rights and receive the benefits during the Insured's life before the Maturity Date. This includes the right to change the Owner, Beneficiaries, and methods for the payment of proceeds. All rights of the Owner are subject to the rights of any assignee and any irrevocable Beneficiary. You may name a new Owner by sending written notice to us. The Effective Date of the change to the new Owner will be the date you sign the notice. The change will not affect any payment made or action taken by us before recording the change at our Customer Service Center. BENEFICIARIES The primary Beneficiary surviving the Insured will receive any death Proceeds which become payable. Surviving contingent Beneficiaries are paid death Proceeds only if no primary Beneficiary has survived the Insured. If more than one Beneficiary in a class survives the Insured, they will share the death Proceeds equally, unless your designation provides otherwise. If there is no designated Beneficiary surviving, you or your estate will be paid the death Proceeds. The Beneficiary designation will be on file with us or at a location designated by us. While you are living, you may name a new Beneficiary. The Effective Date of the change will be the date the request was signed. We will pay proceeds to the most recent Beneficiary designation on file. We will not be subject to multiple payments. EXCHANGE RIGHT If, for any reason within the first 2 Policy years or within 2 years of the Effective Date of an increase, you want to exchange this Policy for a Policy in which values do not vary with the investment experience of the Variable Account, we will exchange this Policy. This transfer will not be subject to the Excess Transfer Charge. The exchange will be implemented by transferring your Account Value in all the Divisions of the Variable Account to the Guaranteed Interest Division and removing your future right to choose to allocate funds to the Divisions of the Variable Account. We will require a return of this Policy before this change will be processed. COLLATERAL ASSIGNMENT You may assign this Policy as collateral security by written notice to us. Once it is recorded with us, the rights of the Owner and Beneficiary are subject to the assignment. It is your responsibility to make sure the assignment is valid. INCONTESTABILITY After this Policy has been in force during the Insured's life for 2 years from the Policy date, we will not contest the statements in the application attached at issue. After this Policy has been in force during the Insured's life for 2 years from the Effective Date of any increase in any benefit with respect to the Insured, we will not contest the statements in the application for the increase. We also have the right to rescind if the Policy if we issued or reinstated this Policy based on a statement in the application, including a reinstatement application, that was willfully false, fraudulent or misleading. Form 1197 (VUL) - MA - 5/97 Page 25 MISSTATEMENT OF AGE OR SEX If the Age or sex of the Insured has been misstated, the death benefit will be adjusted. The death benefit will be that which the cost of insurance which was deducted from your Account Value on the last Monthly Processing Date prior to the death of the Insured would have purchased for the Insured's correct Age and sex. SUICIDE EXCLUSION If the Insured commits suicide, while sane or insane, within 2 years of the Policy date, we will make a limited payment to the Beneficiary. We will pay in one sum the amount of all Premiums paid to us during that time, minus any outstanding Policy Loan (including accrued but unpaid interest) and Partial Withdrawals. If the Insured commits suicide, while sane or insane, within 2 years of the Effective Date of an increase in the Stated Death Benefit, we will make a limited payment to the Beneficiary for the increase. This payment will equal the cost of insurance and any applicable monthly expense charges deducted for such increase. PERIODIC REPORTS We will send you at least once each year a report which shows the current Account Value, Cash Surrender Value and Premiums paid since the last report. The report will also show the allocation of your Account Value as of the date of the report and the amounts added to or deducted from your Account Value of each Division since the last report. The report will include any other information that may be currently required by the insurance supervisory official of the jurisdiction in which this Policy is delivered. ILLUSTRATION OF BENEFITS AND VALUES We will send you, upon written request, a hypothetical illustration of future death benefits and Account Values. This illustration will include the information as required by the laws or regulations where this Policy is delivered. If you request more than one illustration during a Policy year, we will charge a reasonable fee for each additional illustration. The maximum amount of this fee is shown in the Schedule. NONPARTICIPATING The Policy does not participate in our surplus earnings. CUSTOMER SERVICE CENTER Our Customer Service Center is at the address shown in the Schedule. Unless you are otherwise notified: a) All requests and payments should be sent to us at our Customer Service Center; and b) All transactions are effective as of the Valuation Date the required information is received at our Customer Service Center. PAYOUTS OTHER THAN AS ONE SUM ELECTION During the Insured's lifetime, you may elect that the Beneficiary receive the proceeds upon death of the Insured other than in one sum. If you have not made an election, the Beneficiary may do so within 60 days after the Insured's death. You may also elect to take the net Cash Surrender Value of the Form 1197 (VUL) - 5/97 Page 26 Policy upon its surrender other than in one sum. Satisfactory written request must be received at our Customer Service Center before payment can be made. A payee that is not a natural person may not be named without our consent. The various methods of settlement are described in the following Payout Options section. PAYOUT OPTIONS OPTION I. PAYOUTS FOR A DESIGNATED PERIOD. Payouts will be made in 1, 2, 4, or 12 installments per year as elected for a designated period, which may be 5 to 30 years. The installment dollar amounts will be equal except for any Excess Interest as described below. The amount of the first monthly payout for each $1,000 of Account Value applied is shown in Settlement Option Table I. OPTION II. LIFE INCOME WITH PAYOUTS FOR DESIGNATED PERIOD. Payouts will be made in 1, 2, 4, or 12 installments per year throughout the payee's lifetime, or if longer, for a period of 5, 10, 15 or 20 years as elected. The installment dollar amounts will be equal except for any Excess Interest, as described below. The amount of the first monthly payout for each $1,000 of Account Value applied is shown in Settlement Option Table II. This option is not available for ages not shown in the Table. OPTION III. HOLD AT INTEREST. Amounts may be left on deposit with us to be paid upon the death of the payee or at any earlier date elected. Interest on any unpaid balance will be at the rate declared by us or at any higher rate required by law. Interest may be accumulated or paid in 1, 2, 4, or 12 installments per year, as elected. Money may not be left on deposit for more than 30 years. OPTION IV. PAYOUTS OF A DESIGNATED AMOUNT. Payouts will be made until proceeds, together with interest, which will be at the rate declared by us or at any higher rate required by law, are exhausted. Payouts will be made in 1, 2, 4, or 12 equal installments per year, as elected. OPTION V. OTHER. Settlement may be made in any other manner as agreed upon in writing between you (or the Beneficiary) and us. CHANGE AND WITHDRAWAL You may change an election at any time before the death of the Insured or maturity of the Policy. If you have given the Beneficiary the right to make changes or withdrawals, or if the Beneficiary has elected the option, the Beneficiary (as primary payee) may take the actions below. a) Changes may be made from Payout Options I, III, and IV to another option. b) Full withdrawals may be made under Payout Option III or IV. Partial Withdrawals of not less than $300 may be made under Payout Option III. c) Remaining installments under Payout Option I may be commuted at 31/2% interest and received in one sum. d) Changes in any contingent payee designation may be made. A written request must be sent to our Customer Service Center in writing to make a change or withdrawal. We also may require that you send in the Supplemental Policy. We may defer payment of commuted and withdrawable amounts for a period up to 6 months. EXCESS INTEREST If we declare that Payout Options are to be credited with an interest rate above that guaranteed, it will apply to Payout Options I, II, III, and IV. The crediting of excess interest for one period does not guarantee the higher rate for other periods. Any declared interest rate will be in effect for at least 12 months. Form 1197 (VUL) - 5/97 Page 27 MINIMUM AMOUNTS The minimum amount which may be applied under any option is $2,000. If the payments to the payee are ever less than $20, we may change the frequency of payments so as to result in payments of at least that amount. SUPPLEMENTARY POLICY When an option becomes effective, the Policy will be surrendered in exchange for a Supplementary Policy. It will provide for the manner of settlement and rights of the payees. The Supplementary Policy's Effective Date will be the date of the Insured's death or the date of other settlement. The first payment under Options I, II, and IV will be payable as of the Effective Date. The first interest payment under Option III will be made as of the end of the interest payment period elected. Subsequent payments will be made in accordance with the frequency of payment elected. The Supplementary Policy may not be assigned or payments made to another without our consent. INCOME PROTECTION Unless otherwise provided in the election, a payee does not have the right to commute, transfer or encumber amounts held or installments to become payable. To the extent provided by law, the proceeds, amount retained, and installments are not subject to any payee's debts, polices, or engagements. DEATH OF PRIMARY PAYEE Upon the primary payee's death, any payments certain under Option I or II, interest payments under Option III, or payments under Option IV will be continued to the contingent payee. Or, amounts may be released in one sum if permitted by the Policy. The final payee will be the estate of the last to die of the primary payee and any contingent payee. PAYMENTS OTHER THAN MONTHLY The tables which follow show monthly installments for Options I and II. To arrive at annual, semiannual, or quarterly payments, multiply the appropriate figures by 11.813, 5.957 or 2.991 respectively. Factors for other periods certain or for other options which may be provided by mutual agreement will be provided upon reasonable request. Form 1197 (VUL) - 5/97 Page 28 SETTLEMENT OPTION TABLE I (Per $1,000 of Net Proceeds)
- ----------------------------------------------------------- No. of Monthly No. of Monthly Years Payable Installments Years Payable Installments - ----------------------------------------------------------- 1 $84.65 16 6.76 - ----------------------------------------------------------- 2 43.05 17 6.47 - ----------------------------------------------------------- 3 29.19 18 6.20 - ----------------------------------------------------------- 4 22.27 19 5.97 - ----------------------------------------------------------- 5 18.12 20 5.75 - ----------------------------------------------------------- - ----------------------------------------------------------- 6 15.35 21 5.56 - ----------------------------------------------------------- 7 13.38 22 5.39 - ----------------------------------------------------------- 8 11.90 23 5.24 - ----------------------------------------------------------- 9 10.75 24 5.09 - ----------------------------------------------------------- 10 9.83 25 4.96 - ----------------------------------------------------------- - ----------------------------------------------------------- 11 9.09 26 4.84 - ----------------------------------------------------------- 12 8.46 27 4.73 - ----------------------------------------------------------- 13 7.94 28 4.63 - ----------------------------------------------------------- 14 7.49 29 4.53 - ----------------------------------------------------------- 15 7.10 30 4.45 - -----------------------------------------------------------
Form 1197 (VUL) - 5/97 Page 29 SETTLEMENT OPTION TABLE II
- ------------------------------------------------------------------------------------------------------------------------------ (Per $1,000 of Net Proceeds) - ------------------------------------------------------------------------------------------------------------------------------ Age of Payee Nearest Age of Payee Nearest Birthday When First Birthday When First Installment is Payable Monthly Installment Installment is Payable Monthly Installment - ------------------------------------------------------------------------------------------------------------------------------ 5 Years 10 Years 15 Years 20 Years 5 Years 10 Years 15 Years 20 Years Male Female Certain Certain Certain Certain Male Female Certain Certain Certain Certain - ------------------------------------------------------------------------------------------------------------------------------ 15 20 3.31 3.31 3.31 3.31 33 38 3.77 3.77 3.75 3.74 - ------------------------------------------------------------------------------------------------------------------------------ 16 21 3.33 3.33 3.33 3.32 34 39 3.80 3.80 3.79 3.77 - ------------------------------------------------------------------------------------------------------------------------------ 17 22 3.35 3.35 3.34 3.34 35 40 3.84 3.84 3.83 3.81 - ------------------------------------------------------------------------------------------------------------------------------ 18 23 3.37 3.37 3.36 3.36 36 41 3.88 3.88 3.87 3.84 - ------------------------------------------------------------------------------------------------------------------------------ 19 24 3.39 3.38 3.38 3.38 37 42 3.93 3.93 3.91 3.88 - ------------------------------------------------------------------------------------------------------------------------------ 20 25 3.41 3.40 3.40 3.40 38 43 3.97 3.97 3.95 3.92 - ------------------------------------------------------------------------------------------------------------------------------ 21 26 3.43 3.43 3.42 3.42 39 44 4.02 4.02 4.00 3.96 - ------------------------------------------------------------------------------------------------------------------------------ 22 27 3.45 3.45 3.44 3.44 40 45 4.07 4.07 4.05 4.00 - ------------------------------------------------------------------------------------------------------------------------------ 23 28 3.47 3.47 3.47 3.46 41 46 4.13 4.13 4.09 4.05 - ------------------------------------------------------------------------------------------------------------------------------ 24 29 3.50 3.49 3.49 3.48 42 47 4.18 4.18 4.14 4.09 - ------------------------------------------------------------------------------------------------------------------------------ 25 30 3.52 3.52 3.57 3.51 43 48 4.24 4.24 4.20 4.14 - ------------------------------------------------------------------------------------------------------------------------------ 26 31 3.55 3.54 3.54 3.53 44 49 4.30 4.30 4.25 4.18 - ------------------------------------------------------------------------------------------------------------------------------ 27 32 3.58 3.57 3.57 3.56 45 50 4.36 4.36 4.31 4.23 - ------------------------------------------------------------------------------------------------------------------------------ 28 33 3.60 3.60 3.59 3.58 46 51 4.43 4.43 4.37 4.28 - ------------------------------------------------------------------------------------------------------------------------------ 29 34 3.64 3.63 3.60 3.61 47 52 4.49 4.49 4.43 4.34 - ------------------------------------------------------------------------------------------------------------------------------ 30 35 3.67 3.66 3.65 3.64 48 53 4.56 4.56 4.49 4.39 - ------------------------------------------------------------------------------------------------------------------------------ 31 36 3.70 3.70 3.69 3.67 49 54 4.64 4.64 4.55 4.44 - ------------------------------------------------------------------------------------------------------------------------------ 32 37 3.74 3.73 3.72 3.70 50 55 4.77 4.71 4.62 4.50 - ------------------------------------------------------------------------------------------------------------------------------
Form 1197 (VUL) - 5/97 Page 30 SETTLEMENT OPTION TABLE II (Continued)
- ------------------------------------------------------------------------------------------------------------------------------ (Per $1,000 of Net Proceeds) - ------------------------------------------------------------------------------------------------------------------------------ Age of Payee Nearest Age of Payee Nearest Birthday When First Birthday When First Installment is Payable Monthly Installment Installment is Payable Monthly Installment - ------------------------------------------------------------------------------------------------------------------------------ 5 Years 10 Years 15 Years 20 Years 5 Years 10 Years 15 Years 20 Years Male Female Certain Certain Certain Certain Male Female Certain Certain Certain Certain - ------------------------------------------------------------------------------------------------------------------------------ 51 56 4.85 4.79 4.69 4.55 69 74 7.52 7.00 6.29 5.56 - ------------------------------------------------------------------------------------------------------------------------------ 52 57 4.94 4.87 4.76 4.61 70 75 7.77 7.17 6.38 5.60 - ------------------------------------------------------------------------------------------------------------------------------ 53 58 5.04 4.96 4.84 4.67 71 76 8.04 7.35 6.47 5.63 - ------------------------------------------------------------------------------------------------------------------------------ 54 59 5.14 5.05 4.91 4.73 72 77 8.32 7.53 6.55 5.66 - ------------------------------------------------------------------------------------------------------------------------------ 55 60 5.24 5.14 4.99 4.79 73 78 8.62 7.71 6.63 5.68 - ------------------------------------------------------------------------------------------------------------------------------ 56 61 5.35 5.24 5.07 4.85 74 79 8.94 7.89 6.71 5.70 - ------------------------------------------------------------------------------------------------------------------------------ 57 62 5.47 5.34 5.15 4.91 75 80 9.28 8.07 6.78 5.72 - ------------------------------------------------------------------------------------------------------------------------------ 58 63 5.59 5.45 5.24 4.97 76 81 9.63 8.25 6.84 5.73 - ------------------------------------------------------------------------------------------------------------------------------ 59 64 5.71 5.56 5.33 5.03 77 82 10.00 8.43 6.89 5.74 - ------------------------------------------------------------------------------------------------------------------------------ 60 65 5.85 5.68 5.42 5.10 78 83 10.39 8.60 6.94 5.74 - ------------------------------------------------------------------------------------------------------------------------------ 61 66 5.99 5.80 5.51 5.16 79 84 10.80 8.77 6.98 5.75 - ------------------------------------------------------------------------------------------------------------------------------ 62 67 6.15 5.93 5.61 5.21 80 85 11.22 8.93 7.01 5.75 - ------------------------------------------------------------------------------------------------------------------------------ 63 68 6.31 6.07 5.70 5.27 81 11.66 9.08 7.04 5.75 - ------------------------------------------------------------------------------------------------------------------------------ 64 69 6.48 6.21 5.80 5.33 82 12.12 9.21 7.06 5.75 - ------------------------------------------------------------------------------------------------------------------------------ 65 70 6.66 6.35 5.90 5.38 83 12.60 9.34 7.07 5.75 - ------------------------------------------------------------------------------------------------------------------------------ 66 71 6.86 6.50 6.00 5.43 84 13.09 9.44 7.08 5.75 - ------------------------------------------------------------------------------------------------------------------------------ 67 72 7.07 6.66 6.10 5.48 85 13.59 9.54 7.09 5.75 - ------------------------------------------------------------------------------------------------------------------------------ 68 73 7.29 6.83 6.19 5.52 - ------------------------------------------------------------------------------------------------------------------------------
Form 1197 (VUL) - 5/97 Page 31 THIS POLICY IS A FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY DEATH BENEFITS AND POLICY VALUES PROVIDED BY THIS CONTRACT, WHEN BASED ON THE INVESTMENT EXPERIENCE OF A SEPARATE ACCOUNT, ARE VARIABLE. THESE VALUES MAY INCREASE OR DECREASE BASED ON INVESTMENT EXPERIENCE AND ARE NOT GUARANTEED AS TO FIXED DOLLAR AMOUNT. DEATH BENEFITS ARE PAYABLE BY US UPON THE DEATH OF THE INSURED PRIOR TO THE MATURITY DATE AS DESCRIBED IN THE PAYOUT OF PROCEEDS PROVISION. UNDER CERTAIN CIRCUMSTANCES THE ENTIRE INVESTMENT COULD BE LOST, DEPENDING ON THE PERFORMANCE OF THE SEPARATE ACCOUNT, AND AS A RESULT THERE COULD BE NO DEATH BENEFIT ABSENT ADDITIONAL PAYMENTS MADE TO KEEP THE POLICY IN FORCE. YOUR NET ACCOUNT VALUE, IF ANY, IS PAYABLE BY US IF THE INSURED IS LIVING AS OF THE MATURITY DATE. FLEXIBLE PREMIUMS ARE PAYABLE BY YOU DURING THE LIFETIME OF THE INSURED UNTIL THE MATURITY DATE. SECURITY LIFE OF DENVER INSURANCE COMPANY A Stock Company CUSTOMER SERVICE CENTER [P.O. Box 173763, Denver, Colorado 80217-3763 Toll Free Number: 1(800)933-5858] Form 1197 (VUL) - MA - 5/97 EX-1.A(5)(A)(III) 6 EXHIBIT 1.A(5) (A) (III) Exhibit 1.A (5)(a)(iii) SECURITY LIFE OF DENVER INSURANCE COMPANY INSURED: JOHN DOE POLICY DATE: May 27, 1997 POLICY NUMBER: 60000001 STATED DEATH BENEFIT: $150,000.00 WE AGREE TO PAY the death benefit to the Beneficiary upon the death of the Insured while this Policy is in force. WE AGREE TO PAY your Net Account Value to you as of the Maturity Date if the Insured is living on that date. WE ALSO AGREE to provide the other rights and benefits of the Policy. These agreements are subject to the provisions of the Policy. RIGHT TO EXAMINE POLICY PERIOD. You have the right to examine and return this Policy within 10 days after receipt. The policy will be deemed to have been received by you 5 days after the policy is mailed from our Customer Service Center. The Policy may be returned by delivering or mailing it to us at our Customer Service Center. Immediately upon return it will be deemed void as of the Policy Date. Upon return of the Policy to us, we will refund all premiums paid. In this Policy "you" and "your" refer to the Owner of the Policy. "We", "us" and "our" refer to Security Life of Denver Insurance Company. /s/ Eugene L. Copeland /s/ Stephen M. Christopher Secretary President THIS POLICY IS A FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY. DISCLOSURE OF GUARANTY FUND NONPARTICIPATION. DEATH BENEFITS AND OTHER VALUES PROVIDED BY THIS CONTRACT, WHEN BASED ON THE INVESTMENT EXPERIENCE OF A SEPARATE ACCOUNT, ARE VARIABLE. THESE VALUES MAY INCREASE OR DECREASE BASED ON INVESTMENT EXPERIENCE AND ARE NOT GUARANTEED AS TO FIXED DOLLAR AMOUNT. DEATH BENEFITS ARE PAYABLE BY US UPON THE DEATH OF THE INSURED PRIOR TO THE MATURITY DATE. YOUR NET ACCOUNT VALUE, IF ANY, IS PAYABLE BY US IF THE INSURED IS LIVING AS OF THE MATURITY DATE. FLEXIBLE PREMIUMS ARE PAYABLE BY YOU DURING THE LIFETIME OF THE INSURED UNTIL THE MATURITY DATE. SECURITY LIFE OF DENVER INSURANCE COMPANY A Stock Company Customer Service Center [P.O. Box 173763, Denver, Colorado 80217-3763 Toll Free Number: 1(800)933-5858] Form 1197 (VUL) - TX - 5/97 IMPORTANT NOTICE To obtain information or make a complaint: 1. You may contact your Client Service Representative 1-800-933-5858. 2. You may call Security Life of Denver's toll-free telephone number for information or to make a complaint at: 1-800-933-5858 3. You may also write to Security Life of Denver at: P.O. box 173763 Denver, CO 80217-3763 4. You may contact the Texas Department of Insurance to obtain information on companies, coverages, rights or complaints at: 1-800-252-3439 5. You may write the Texas Department of Insurance P.O. Box 149104 Austin, TX 78714-9104 FAX# (512) 475-1771 6. PREMIUM OR CLAIM DISPUTES: Should you have a dispute concerning your premium or about a claim you should contact Security Life of Denver first. If the dispute is not resolved, you may contact the Texas Department of Insurance. 7. ATTACH THIS NOTICE TO YOUR POLICY: This notice is for information only and does not become a part or condition of the attached document. AVISO IMPORTANTE Para obtener informacion o para someter una queja: 1. Puede comunicarse con su Client Service Representative al 1-800-933-5858. 2. Usted puede llamar al numero de telefono gratis de Security Life of Denver's para informacion o para someter una queja al 1-800-933-5858 3. Usted tambien puede escribir a Security Life of Denver P.O. Box 173763 Denver, CO 80217-3763 4. Puede comunicarse con el Departamento de Seguros de Texas para obtener informacion acerca de companias, coberturas, derechos oquejas al 1-800-252-3439 5. Puede escribir al Departamento de Seguros de Texas P.O. Box 149104 Austin, TX 78714-9104 FAX# (512) 475-1771 6. DISPUTAS SOBRE PRIMAS O RECLAMOS: Si tiene una disputa concernmiente a su prima o a un reclamo, debe comunicarse con el Security Life of Denver primero. Si no se resuelve la disputa, puede entonces comunicarse con el departamento (TDI). 7. UNA ESTE AVISO A SU POLIZA: Este aviso es solo para proposito de informacion y no se convierteen parte o condicion del documents adjunto. E-1294-TX TABLE OF CONTENTS
SCHEDULE................................................................... DEFINITION OF TERMS........................................................ 5 INSURANCE COVERAGE PROVISIONS.............................................. 6 INITIAL PREMIUM ALLOCATION............................................ 7 VALUATION DATE........................................................ 7 VALUATION PERIOD...................................................... 7 EFFECTIVE DATE OF COVERAGE............................................ 7 PAYOUT OF PROCEEDS.................................................... 7 BASE DEATH BENEFIT.................................................... 8 CHANGE IN REQUESTED INSURANCE COVERAGE................................ 8 Requested Increases in Coverage.................................. 9 Requested Decreases in Coverage.................................. 9 Death Benefit Option Changes..................................... 9 PREMIUM PROVISIONS......................................................... 10 SCHEDULED PREMIUMS.................................................... 10 UNSCHEDULED PREMIUMS.................................................. 10 PREMIUM LIMITATION.................................................... 11 PREMIUM ALLOCATION.................................................... 11 VARIABLE ACCOUNT PROVISIONS................................................ 11 THE VARIABLE ACCOUNT.................................................. 11 VARIABLE ACCOUNT DIVISIONS............................................ 11 CHANGES WITHIN THE VARIABLE ACCOUNT................................... 11 GENERAL ACCOUNT PROVISIONS................................................. 12 THE GENERAL ACCOUNT................................................... 13 GUARANTEED INTEREST DIVISION.......................................... 13 LOAN DIVISION......................................................... 13
................................................................... 13 Form 1197 (VUL) Page 2 TRANSFER PROVISIONS........................................................ 13 TRANSFERS TO OR FROM THE GUARANTEED INTEREST DIVISION................. 13 EXCESS TRANSFER CHARGE................................................ 14 DOLLAR COST AVERAGING................................................. 14 AUTOMATIC REBALANCING................................................. 15 ACCOUNT VALUE PROVISIONS................................................... 15 NET PREMIUM........................................................... 16 ACCOUNT VALUES ON THE INVESTMENT DATE................................. 16 ACCUMULATION UNIT VALUE............................................... 16 ACCUMULATION EXPERIENCE FACTOR........................................ 16 ACCOUNT VALUE OF THE DIVISIONS OF THE VARIABLE ACCOUNT................ 17 ACCOUNT VALUE OF THE GUARANTEED INTEREST DIVISION..................... 17 ACCOUNT VALUE OF THE LOAN DIVISION.................................... 17 MONTHLY DEDUCTION AND REFUND............................................... 18 MONTHLY DEDUCTION..................................................... 18 COST OF INSURANCE..................................................... 18 PERSISTENCY REFUND.................................................... 19 LOAN PROVISIONS............................................................ 19 POLICY LOANS.......................................................... 19 LOAN INTEREST......................................................... 19 LOAN DIVISION......................................................... 20 PARTIAL WITHDRAWAL PROVISIONS.............................................. 20 SURRENDER PROVISIONS....................................................... 21 SURRENDER VALUE....................................................... 21 SURRENDER CHARGES..................................................... 21 BASIS OF COMPUTATIONS................................................. 22 FULL SURRENDERS....................................................... 22 GRACE PERIOD, TERMINATION AND REINSTATEMENT PROVISIONS..................... 22 GRACE PERIOD.......................................................... 22 THREE YEAR CONTINUATION PERIOD........................................ 23
Form 1197 (VUL) - TX Page 3 TERMINATION........................................................... 23 REINSTATEMENT......................................................... 23 DEFERRAL OF PAYMENT................................................... 24 GENERAL POLICY PROVISIONS.................................................. 24 THE POLICY............................................................ 24 AGE................................................................... 24 PROCEDURES............................................................ 24 OWNERSHIP............................................................. 25 BENEFICIARIES......................................................... 25 EXCHANGE RIGHT........................................................ 25 COLLATERAL ASSIGNMENT................................................. 25 INCONTESTABILITY...................................................... 25 MISSTATEMENT OF AGE OR SEX............................................ 26 SUICIDE EXCLUSION..................................................... 26 PERIODIC REPORTS...................................................... 26 ILLUSTRATION OF BENEFITS AND VALUES................................... 26 NONPARTICIPATING...................................................... 26 CUSTOMER SERVICE CENTER............................................... 26 PAYOUTS OTHER THAN AS ONE SUM.............................................. 26 ELECTION.............................................................. 26 PAYOUT OPTIONS........................................................ 27 CHANGE AND WITHDRAWAL................................................. 27 EXCESS INTEREST....................................................... 28 MINIMUM AMOUNTS....................................................... 28 SUPPLEMENTARY POLICY.................................................. 28 INCOME PROTECTION..................................................... 28 DEATH OF PRIMARY PAYEE................................................ 28 PAYMENTS OTHER THAN MONTHLY........................................... 28 SETTLEMENT OPTION TABLES I................................................. 29 SETTLEMENT OPTION TABLES II ............................................... 30
Additional benefits or riders, if any, will be listed in the Schedule. The additional provisions will be inserted in the Policy. Form 1197 (VUL) Page 4 SCHEDULE (Effective Date: May 1, 1995) POLICY INFORMATION
Policy Number 61000001 Minimum Stated Death Benefit $50,000.00 Insured JOHN DOE Death Benefit Option OPTION 1: GP/CVC LEVEL DB Three Year Continuation Period Ending Date May, 1998 Age And Sex 35, Male Three-Year Continuation Period Minimum Annual Premium $529 Premium Class High Band Non-Smoker Policy Date May 1, 1995 Scheduled Premium $1,600 Maturity Date May 1, 2060 Definition of Life Insurance Test: Guideline Premium
CUSTOMER SERVICE CENTER: [P.O. Box 173763, Denver, Colorado 80217-3763] Coverage will expire prior to the Maturity Date if the Account Value is insufficient to continue coverage and the Three-Year Continuation Period has ended. Coverage will also be affected by Partial Withdrawals, Policy Loans, changes in the current cost of insurance rates, the actual credited interest rate for the Guaranteed Interest Division and the investment experience of the Variable Account. Form 1197 (VUL) - TX Page 5 SCHEDULE (CONTINUED) BENEFIT PROFILE
- ------------------------------------------------------------------------------------------------------------------------------------ Initial Segment Guideline Benefit Issue Age At Effective Annual Target Description Amount Age Maturity Date Date Premium Premium - ------------------------------------------------------------------------------------------------------------------------------------ Stated Death Benefit (Segment #1) $100,000.00 35 100 May 1, 1995 $1,288.02 $800.00 - ------------------------------------------------------------------------------------------------------------------------------------
Form 1197 (VUL) Page 5A SCHEDULE (CONTINUED) ALLOCATION OF INITIAL PREMIUM AS SHOWN ON APPLICATION [Neuberger & Berman Limited Maturity Bond] 0% [Neuberger & Berman Growth ] 0% [Neuberger & Berman Government Income ] 25% [Neuberger & Berman Partners] 25% [Alger American Growth Division] 0% [Alger American Leveraged All Cap Division] 25% [Alger American MidCap Growth] 0% [Alger American Small Capital] 0% [Fidelity Asset Manager ] 0% [Fidelity Growth ] 25% [Fidelity Overseas ] 0% [Fidelity Money Market ] 0% [Fidelity Index 500 ] 0% [INVESCO Total Return ] 0% [INVESCO Industrial Income ] 0% [INVESCO High Yield ] 0% [INVESCO Utilities ] 0% [Van Eck Worldwide Balanced ] 0% [Van Eck Gold and Natural Resources ] 0% Guaranteed Interest Division 0%
If you elect to invest in a particular Division, at least 1% of your Net Premium must be allocated to that Division provided that the allocation to each Division selected is at least $100. All percentage allocations must be in whole numbers. Form 1197 (VUL) Page 5B SCHEDULE (CONTINUED) EXPENSE CHARGES PREMIUM EXPENSE CHARGES (As a Percent of all Premiums): Sales Load: Segment Issue Age Sales Load 0 - 49 2.25% 50 - 59 3.25% 60+ 4.25% State and Local Taxes: 2.5% Federal Deferred Acquisition Cost Charge: 1.5% We reserve the right to increase or decrease the Premium Expense Charges for taxes due to any change in tax law. We further reserve the right to increase or decrease the Premium Expense Charges for Federal deferred acquisition costs due to any change in the cost to us. MONTHLY EXPENSE CHARGES: $13.00 per Policy month for the first 36 months $3.00 per Policy month thereafter; plus $.0125 per thousand of Stated Death Benefit (or Target Death Benefit, if greater), all years. The per thousand charge is limited to $15.00 per Policy month. ANNUAL MORTALITY AND EXPENSE RISK CHARGE (Based on the percentage of assets in each Variable Account Division) Mortality And Expense Risk Charge 0.75% Form 1197 (VUL) - TX Page 5C SCHEDULE (CONTINUED) SURRENDER CHARGES The maximum Surrender Charges which pertain to the insurance coverages shown in the Schedule are shown in the following table. This table may change upon any increases and/or decreases in the Policy's Stated Death Benefit.
-------------------------------------------- SURRENDERS DURING THE POLICY YEAR TOTAL MAXIMUM ENDING SURRENDER CHARGE -------------------------------------------- 1996 $650.00 ---------------------------------------------- 1997 $650.00 ---------------------------------------------- 1998 $650.00 ---------------------------------------------- 1999 $650.00 ---------------------------------------------- 2000 $650.00 ---------------------------------------------- 2001 $650.00 ---------------------------------------------- 2002 $650.00 ---------------------------------------------- 2003 $568.75 ---------------------------------------------- 2004 $487.50 ---------------------------------------------- 2005 $406.25 ---------------------------------------------- 2006 $325.00 ---------------------------------------------- 2007 $243.75 ---------------------------------------------- 2008 $162.50 ---------------------------------------------- 2009 $ 81.25 ---------------------------------------------- 2010 0 ----------------------------------------------
ADMINISTRATIVE SURRENDER CHARGE TABLE
------------------------------------------------------------ ADMINISTRATIVE SURRENDER SEGMENT CHARGE PER THOUSAND OF ISSUE AGE STATED DEATH BENEFIT ------------------------------------------------------------ ------------------------------------------------------------ 0 - 39 $2.50 ------------------------------------------------------------ 40 - 49 $3.50 ------------------------------------------------------------ 50 - 59 $4.50 ------------------------------------------------------------ 60 - 69 $5.50 ------------------------------------------------------------ 70 and above $6.50 ------------------------------------------------------------
This charge is reduced by 12.5% per year starting 7 Policy years after the segment's Effective Date until it reaches zero at the beginning of the 15th Policy year following that segment's Effective Date or the Policy year in which the insured reaches age 98, whichever is earlier. Form 1197 (VUL) Page 5D SCHEDULE (CONTINUED) POLICYHOLDER TRANSACTION CHARGES Requests for Sales Illustrations: $25 Premium Allocation Changes: $25 for each change over 5 per Policy year Excess Transfer Charge: See the Transfer Provisions section Partial Withdrawal Service Fee: See below POLICY LOANS Policy Loan Interest Rate: 3.75% per year Guaranteed Interest Rate Credited to Loan Division: 3.00% per year Minimum Loan Amount: $100 Maximum Loan Amount: See the Loan Provisions section. PARTIAL WITHDRAWALS Minimum Partial Withdrawal Amount: $100 Maximum Partial Withdrawal Amount: Amount which will leave $500 as the net Cash Surrender Value Partial Withdrawal Service Fee: The lesser of $25 or 2% of the amount withdrawn Limit on Partial Withdrawals: One per Policy year GUARANTEED INTEREST DIVISION Guaranteed Interest Rate For Guaranteed Interest Division: 3.00% per year SCHEDULE (CONTINUED) DEFINITION OF LIFE INSURANCE DEATH BENEFIT FACTORS
ATTAINED FACTOR ATTAINED FACTOR ATTAINED FACTOR ATTAINED FACTOR AGE AGE AGE AGE - ------------------------------------------------------------------------ 0-40 2.50 - ------------------------------------------------------------------------ - ------------------------------------------------------------------------ 41 2.43 56 1.46 71 1.13 86 1.05 - ------------------------------------------------------------------------ 42 2.36 57 1.42 72 1.11 87 1.05 - ------------------------------------------------------------------------ 43 2.29 58 1.38 73 1.09 88 1.05 - ------------------------------------------------------------------------ 44 2.22 59 1.34 74 1.07 89 1.05 - ------------------------------------------------------------------------ 45 2.15 - ------------------------------------------------------------------------ 60 1.30 75 1.05 90 1.05 - ------------------------------------------------------------------------ 46 2.09 61 1.28 76 1.05 91 1.04 - ------------------------------------------------------------------------ 47 2.03 62 1.26 77 1.05 92 1.03 - ------------------------------------------------------------------------ 48 1.97 63 1.24 78 1.05 93 1.02 - ------------------------------------------------------------------------ 49 1.91 64 1.22 79 1.05 94 1.01 - ------------------------------------------------------------------------ 50 1.85 - ------------------------------------------------------------------------ 65 1.20 80 1.05 95 1.01 - ------------------------------------------------------------------------ 51 1.78 66 1.19 81 1.05 96 1.01 - ------------------------------------------------------------------------ 52 1.71 67 1.18 82 1.05 97 1.01 - ------------------------------------------------------------------------ 53 1.64 68 1.17 83 1.05 98 1.01 - ------------------------------------------------------------------------ 54 1.57 69 1.16 84 1.05 99 1.01 - ------------------------------------------------------------------------ 55 1.50 70 1.15 85 1.05 100 1.00 - ------------------------------------------------------------------------ - ------------------------------------------------------------------------
The Base Death Benefit at any time will be at least equal to your Account Value multiplied by the appropriate factor from this table. Form 1197 (VUL) Page 5F TARGET DEATH BENEFIT SCHEDULE TABLE OF TARGET DEATH BENEFITS AND GUARANTEED MAXIMUM COST OF INSURANCE RATES FOR THE ADJUSTABLE TERM INSURANCE RIDER
- ---------------------------------------------------------------------------------------------------------------- POLICY TARGET DEATH GUARANTEED POLICY TARGET DEATH GUARANTEED POLICY TARGET DEATH GUARANTEED YEAR BENEFIT RATES YEAR BENEFIT RATES YEAR BENEFIT RATES - ---------------------------------------------------------------------------------------------------------------- 1 $150,000.00 0.14083 25 $150,000.00 0.95583 49 $150,000.00 10.31583 2 $150,000.00 0.14750 26 $150,000.00 1.05333 50 $150,000.00 11.34250 3 $150,000.00 0.15667 27 $150,000.00 1.16167 51 $150,000.00 12.43333 4 $150,000.00 0.16667 28 $150,000.00 1.28500 52 $150,000.00 13.56667 5 $150,000.00 0.17833 29 $150,000.00 1.42583 53 $150,000.00 14.73250 - ---------------------------------------------------------------------------------------------------------------- 6 $150,000.00 0.19083 30 $150,000.00 1.58500 81 $150,000.00 15.90750 7 $150,000.00 0.20583 31 $150,000.00 1.76083 55 $150,000.00 17.10750 8 $150,000.00 0.22083 32 $150,000.00 1.95000 56 $150,000.00 18.34917 9 $150,000.00 0.23833 33 $150,000.00 2.15500 57 $150,000.00 19.65333 10 $150,000.00 0.25583 34 $150,000.00 2.37500 58 $150,000.00 21.06250 - ---------------------------------------------------------------------------------------------------------------- 11 $150,000.00 0.27667 35 $150,000.00 2.61500 59 $150,000.00 22.63583 12 $150,000.00 0.29917 36 $150,000.00 2.88583 60 $150,000.00 24.63750 13 $150,000.00 0.32333 37 $150,000.00 3.24250 61 $150,000.00 27.49667 14 $150,000.00 0.34917 38 $150,000.00 3.54667 62 $150,000.00 32.04583 15 $150,000.00 0.37833 39 $150,000.00 3.95333 63 $150,000.00 40.01667 - ---------------------------------------------------------------------------------------------------------------- 16 $150,000.00 0.40917 40 $150,000.00 4.41000 64 $150,000.00 54.83167 17 $150,000.00 0.44583 41 $150,000.00 4.90000 65 $150,000.00 83.33333 18 $150,000.00 0.48833 42 $150,000.00 5.42167 19 $150,000.00 0.53583 43 $150,000.00 5.97000 20 $150,000.00 0.59083 44 $150,000.00 6.53917 - ---------------------------------------------------------------------------------------------------------------- 21 $150,000.00 0.65167 45 $150,000.00 7.14333 22 $150,000.00 0.71917 46 $150,000.00 7.80583 23 $150,000.00 0.79083 47 $150,000.00 8.54333 24 $150,000.00 0.86833 48 $150,000.00 9.37667 - ----------------------------------------------------------------------------------------------------------------
The Adjustable Term Insurance Rider Death Benefit is the difference between the Target Death Benefit and the Base Death Benefit provided by the Policy. In no event will the Adjustable Term Insurance Rider Death Benefit be less than zero. Refer to your Adjustable Term Insurance Rider for more information. The guaranteed rates shown FOR THE ADJUSTABLE TERM INSURANCE RIDER are for a standard rate class. If the Adjustable Term Rider is based on a special rate class (other than standard), the guaranteed rates will be adjusted using the rating factor shown in the Schedule for the special class. If the special rate class is a stated percentage increase, the guaranteed rates will be determined by multiplying the rates for a standard rate class shown above by the rating factor shown in the Schedule. If the special rate class is a flat amount per $1,000, the guaranteed rates will be determined by adding the flat amount per $1,000 shown in the Schedule to the rate per $1,000 for the standard rate class shown above. The rates shown above are based on the 1980 Commissioners' Standard Ordinary Mortality Table, age nearest birthday. SCHEDULE (CONTINUED) TABLE OF GUARANTEED RATES Guaranteed Maximum Cost of Insurance Rates Per $1000 (Basic Policy and Additional Insured Rider)
- -------------------------------------------------------------------------------------------------------------------------------- Attained Monthly Cost of Attained Monthly Cost of Attained Monthly Cost of Attained Monthly Cost of Age Insurance Rate Age Insurance Rate Age Insurance Rate Age Insurance Rate - -------------------------------------------------------------------------------------------------------------------------------- 0 0.34900 26 0.12342 51 0.44693 76 5.59039 - -------------------------------------------------------------------------------------------------------------------------------- 1 0.08921 27 0.12175 52 0.48965 77 6.17549 - -------------------------------------------------------------------------------------------------------------------------------- 2 0.08254 28 0.12008 53 0.53742 78 6.78686 - -------------------------------------------------------------------------------------------------------------------------------- 3 0.08170 29 0.12008 54 0.59276 79 7.44038 - -------------------------------------------------------------------------------------------------------------------------------- 4 0.07920 30 0.12008 55 0.65401 80 8.16249 - -------------------------------------------------------------------------------------------------------------------------------- 5 0.07503 31 0.12258 56 0.72203 81 8.97320 - -------------------------------------------------------------------------------------------------------------------------------- 6 0.07169 32 0.12509 57 0.79429 82 9.89813 - -------------------------------------------------------------------------------------------------------------------------------- 7 0.06869 33 0.12926 58 0.87251 83 10.95204 - -------------------------------------------------------------------------------------------------------------------------------- 8 0.06338 34 0.13427 59 0.96090 84 12.11846 - -------------------------------------------------------------------------------------------------------------------------------- 9 0.06169 35 0.14094 60 1.05949 85 13.37460 - -------------------------------------------------------------------------------------------------------------------------------- 10 0.06085 36 0.14762 61 1.16916 86 14.69860 - -------------------------------------------------------------------------------------------------------------------------------- 11 0.06419 37 0.15680 62 1.29417 87 16.08129 - -------------------------------------------------------------------------------------------------------------------------------- 12 0.07086 38 0.16682 63 1.43714 88 17.49682 - -------------------------------------------------------------------------------------------------------------------------------- 13 0.08254 39 0.17851 64 1.59899 89 18.96601 - -------------------------------------------------------------------------------------------------------------------------------- 14 0.09588 40 0.19103 65 1.77812 90 20.51212 - -------------------------------------------------------------------------------------------------------------------------------- 15 0.10756 41 0.20607 66 1.97123 91 22.16549 - -------------------------------------------------------------------------------------------------------------------------------- 16 0.11924 42 0.22110 67 2.18097 92 23.98724 - -------------------------------------------------------------------------------------------------------------------------------- 17 0.12842 43 0.23865 68 2.40660 93 26.06643 - -------------------------------------------------------------------------------------------------------------------------------- 18 0.13343 44 0.25619 69 2.65338 94 28.78427 - -------------------------------------------------------------------------------------------------------------------------------- 19 0.13844 45 0.27709 70 2.93268 95 32.81758 - -------------------------------------------------------------------------------------------------------------------------------- 20 0.14011 46 0.29966 71 3.30181 96 39.64294 - -------------------------------------------------------------------------------------------------------------------------------- 21 0.13927 47 0.32391 72 3.61779 97 53.06605 - -------------------------------------------------------------------------------------------------------------------------------- 22 0.13677 48 0.34984 73 4.04199 98 83.33333 - -------------------------------------------------------------------------------------------------------------------------------- 23 0.13427 49 0.37912 74 4.52073 99 83.33333 - -------------------------------------------------------------------------------------------------------------------------------- 24 0.13093 50 0.41009 75 5.03724 - -------------------------------------------------------------------------------------------------------------------------------- 25 0.12675 - --------------------------------------------------------------------------------------------------------------------------------
The rates shown are for a standard rate class. If the Policy is based on a special rate class (other than standard), the maximum cost of insurance rates will be adjusted using the rating factor shown in the Schedule for the special class. If the special rate class is a stated percentage increase, the maximum cost of insurance rates will be determined by multiplying the rates for a standard rate class shown above by the rating factor shown in the Schedule. If the special rate class is a flat amount per $1,000, the maximum cost of insurance rates will be determined by adding the flat amount per $1,000 shown in the Schedule to the rate per $1,000 for the standard rate class shown above. The rates shown above are based on the 1980 Commissioners' Standard Ordinary Nonsmoker Mortality Table, age nearest birthday. DEFINITION OF TERMS ACCOUNT VALUE - The sum of the amounts allocated to the Divisions of the Variable Account and to the Guaranteed Interest Division, as well as any amount set aside in the Loan Division to secure a Policy Loan. ACCUMULATION UNIT VALUE - The value of the Accumulation Units of each Division of the Variable Account. The Accumulation Unit Value is determined as of each Valuation Date. BASE DEATH BENEFIT - Initially this is the Stated Death Benefit under the Policy. The Base Death Benefit may be greater than the Stated Death Benefit depending on which death benefit option and which test for the Federal income tax law definition of life insurance you choose. CASH SURRENDER VALUE - The amount of your Account Value minus the Surrender Charge, if any. CUSTOMER SERVICE CENTER - Our administrative office at [P.O. Box 173763, Denver, CO 80217-3763]. DIVISION(S) OF THE VARIABLE ACCOUNT - The investment options available, each of which invests in shares of one of the Portfolios. GENERAL ACCOUNT - The account which contains all of our assets other than those held in the Variable Account or our other separate accounts. GENERAL INTEREST DIVISION - Part of our General Account to which a portion of the Account Value may be allocated and which provides guarantees of principal and interest. INVESTMENT DATE - The date on which the initial Net Premium we receive will be allocated to your Policy. We will not allocate funds to your Policy until we receive at least one quarter of the Minimum Annual Premium as shown in the Schedule attached to your Policy and we have approved your Policy for issue. LOAN DIVISION - Part of our General Account in which funds are set aside to secure any outstanding Policy Loan and accrued loan interest when due. MATURITY DATE - The date the Policy matures. This is the Policy anniversary on which the Insured's Age is 100. MONTHLY PROCESSING DATE - The date each month on which the monthly deductions from the Account Value are due. The first Monthly Processing Date will be the Policy Date or the Investment Date, if later. Subsequent Monthly Processing Dates will be the same date as the Policy Date each month unless this is not a Valuation Date, in which case the Monthly Processing Date occurs on the next Valuation Date. NET ACCOUNT VALUE - The amount of the Account Value minus any Policy Loan and accrued loan interest. NET CASH SURRENDER VALUE - The amount of the Cash Surrender Value minus any Policy Loan and accrued loan interest. NET PREMIUM - Premium amounts paid less the sales and tax charges. These charges are deducted from the premiums before the premium is applied to your Account Value. PARTIAL WITHDRAWAL - The withdrawal of a portion of your Net Cash Surrender Value from the Policy. The Partial Withdrawal may cause you to incur a Surrender Charge, and it may reduce the amount of Death Proceeds in force. POLICY LOAN - The sum of amounts you have borrowed from your Policy, increased by any Policy Loan interest capitalized when due, and reduced by any Policy Loan repayments. RIGHT TO EXAMINE POLICY PERIOD - The period of time within which the Owner may examine the Policy and return it for a refund. SCHEDULED PREMIUM - The premium amount which you specify on the application as the amount you intend to pay at fixed intervals over a specified period of time. We will send you premium reminder notices for the amount of the Scheduled Premium on a quarterly, semiannual, or annual basis, as you determine; you need not pay the Scheduled Premium, and you may change it at any time. Also, within limits, you may pay less or more than the Scheduled Premium. STATED DEATH BENEFIT - The initial amount of Base Death Benefit under the Policy. The Stated Death Benefit amount will not vary unless you change it. SURRENDER CHARGE - The charge made against your Account Value in the event of surrender, Policy lapse, requested reductions in the Stated Death Benefit, or certain Partial Withdrawals. The Surrender Charge consists of the administrative Surrender Charge and the sales Surrender Change. VALUATION PERIOD - The period which begins at 4:00 p.m. Eastern Time on a Valuation Date and ends at 4:00 p.m. Eastern Time on the next succeeding Valuation Date. INSURANCE COVERAGE PROVISIONS INITIAL PREMIUM ALLOCATION We will not allocate funds to your Policy until we receive at least one quarter of the Minimum Annual Premium. The Minimum Annual Premium is listed in the Schedule. The Valuation Date on which we receive this amount and have approved your Policy for issue is the Investment Date. As of the Investment Date, the amount you have asked to be invested in the Divisions of the Variable Account will be allocated to the [Fidelity Investments Money Market Division]. Any amount you have designated for allocation to the Guaranteed Interest Division will be allocated to that Division. The amount allocated to the [Fidelity Investments Money Market Division] will remain there until the end of the Right to Examine Policy Period, at which time the balance will be transferred to the other Divisions of the Variable Account according to the allocations shown in the Schedule. VALUATION DATE A Valuation Date is any day: a) The New York Stock Exchange ("NYSE") is open for trading and on which Security Life's Customer Service Center is open for business; or b) As may be required by law. VALUATION PERIOD A Valuation Period begins at 4 p.m. Eastern time on a Valuation Date and ends at 4 p.m. Eastern time on the next succeeding Valuation Date. All Policy processing for a Valuation Period takes place as of the end of the Valuation Period. EFFECTIVE DATE OF COVERAGE The Policy date shown in the Schedule is the Effective Date for all coverage provided in the original application. The Effective Date is subject to the payment of at least one quarter of the Minimum Annual Premium and the acceptance of the Policy by you during the continued insurability of all persons insured by this Policy and any riders attached. The Policy date is the date from which we measure Policy years and determine the Monthly Processing Date. The first Monthly Processing Date is the Investment Date. Future Monthly Processing Dates are the same calendar day of each month as the Policy date unless this is not a Valuation Date in which case the Monthly Processing Date occurs on the next Valuation Date. A Policy anniversary occurs each year on the same month and day as the Policy date unless this is not a Valuation Date in which case the Policy anniversary occurs on the next Valuation Date. If the Policy date is February 29th, the Policy anniversary will be February 28th in years in which there is not a February 29th. The Effective Date for increases and additional benefits is shown in the Schedule. Form 1197(VUL) Page 7 PAYOUT OF PROCEEDS The Payout of Proceeds is the amount we will pay: a) as of the Maturity Date, b) upon surrender of the Policy before the Maturity Date, or c) upon the death of the Insured before the Maturity Date. The Payout of Proceeds as of the Maturity Date will be your Net Account Value. The Payout of Proceeds upon surrender of this Policy prior to the Maturity Date will be the net Cash Surrender Value. The Maturity Date is the Policy anniversary on which the Insured's Age is 100. The Insured's Age is the Age listed in the Schedule increased by the number of completed Policy years since the Policy date. The Payout of Proceeds upon the death of the Insured will be the Base Death Benefit; plus any amounts payable from any additional benefits provided by rider; minus any outstanding Policy Loan including accrued but unpaid interest; minus any unpaid monthly deductions incurred prior to the date of death. We will determine the amount of proceeds payable upon the death of the Insured when we have received due proof of death and any other information which is necessary to process the claim. Any proceeds we pay are subject to adjustments as provided in the Misstatement of Age or Sex, Suicide Exclusion and Incontestability provisions. We will pay Proceeds in one sum unless you request an alternate form of payment. There are many possible methods of payment. The available Payout Options are described in the Payouts Other Than As One Sum provision. Contact us or your agent for additional information. Interest will be paid on the one sum death Proceeds from the date we determine the death Proceeds to the date of payment, or until a Payout Option is selected. Interest will be at the rate we declare, or at any higher rate required by law. BASE DEATH BENEFIT The total Stated Death Benefit is the sum of the Stated Death Benefit for all coverage segments. The Stated Death Benefit for each coverage segment and the death benefit option are shown in the Schedule. The Base Death Benefit is determined by the death benefit option which you select as follows: Option 1 The Base Death Benefit equals the total Stated Death Benefit. Option 2 The Base Death Benefit equals the total Stated Death Benefit, plus your Account Value. Option 3 The Base Death Benefit equals the total Stated Death Benefit, plus the sum of Premiums paid minus Partial Withdrawals taken. The Base Death Benefit at any time will be at least equal to your Account Value multiplied by the appropriate factor from the Definition of Life Insurance Factors table as shown in the Schedule. This Policy is designed to qualify as a life insurance contract under the Internal Revenue Code. All terms and provisions of the Policy shall be construed in a manner consistent with that design. The amount of insurance in force at any time shall not be less than the amount of insurance necessary to achieve such qualification under the applicable provisions of the Internal Revenue Code in existence at the time the Policy is issued. We reserve the right to amend the Policy or adjust the amount of insurance when required. We will send you a copy of any Policy amendment. CHANGE IN REQUESTED INSURANCE COVERAGE At least 30 days prior to a Policy Anniversary, you may request that the insurance coverage be increased or decreased. You may not increase coverage after the Insured is Age 86. You may change the coverage only once each Policy year on the Policy anniversary. The change in coverage may not be for an amount less than $1,000. The Effective Date of the change will be the Policy anniversary next following the date the written application is approved by us. After any change to the Stated Death Benefit, you will receive a new Schedule which will include the Stated Death Benefit, the benefit under any riders, if applicable, the Guaranteed Cost of Insurance rates, the Guideline Annual Premium, the new Target Premium and the new Surrender Charge. REQUESTED INCREASES IN COVERAGE At least 30 days prior to a Policy anniversary, you may request an increase in the Stated Death Benefit. An increase will become effective as of the Policy anniversary after we have approved your application for increase. You must provide evidence satisfactory to us that the Insured is insurable according to our normal rules of underwriting for this type of Policy. This evidence will include an application and may include required medical information. An increase will consist of a new coverage segment of Stated Death Benefit subject to our limits. You will have the right to cancel an increase in the death benefit within the later of: a) 45 days after you sign the application for the increase, b) 20 days after you have received the new Schedule, or c) 10 days after we mail you the Notice of Withdrawal Right. The new Schedule will be deemed to have been received by you 15 days after it is mailed from our Customer Service Center. You may cancel an increase by sending notice in a form acceptable to us to our Customer Service Center. During this period, we will allocate the Premiums you pay related to the increase to the [Fidelity Investments Money Market Division] of the Variable Account. At the end of this period, the amount of the Premium remaining in the [Fidelity Investments Money Market Division] will be transferred to the Division of the Variable Account according to your most recent written allocation instruction. If you cancel an increase we will refund to you any charges attributable to the increase. An increase in the Stated Death Benefit will result in a new Sales Load. Premium allocated to an increase in coverage will be subject to a new Sales Load. REQUESTED DECREASES IN COVERAGE At least 30 days prior to a Policy anniversary, you may request a decrease in the Stated Death Benefit. A decrease will be effective as of the Policy anniversary. You may decrease the Stated Death Benefit if the Effective Date of the decrease will occur after the later of 2 years from the Policy date or 2 years after the most recent increase was made. A requested decrease will first reduce Adjustable Term Insurance Rider coverage segments, if any are attached to your Policy, beginning with the most recently added, and will then reduce each of the Stated Death Benefit segments in the same proportion as the total Stated Death Benefit is reduced. A Surrender Change will apply if the Stated Death Benefit is decreased and the decrease occurs during the 14 years following the Policy date or the date of the prior increase. If a Surrender Charge applies, it will be deducted from your Account Value and future Surrender Charges will be reduced. The sum of the Stated Death Benefit for all coverage segments after any change may not be less than the minimum Stated Death Benefit shown in the Schedule DEATH BENEFIT OPTION CHANGES At least 30 days prior to a Policy anniversary, you may request a change to the death benefit option. This change will be effective as of the Policy anniversary. A death benefit option change applies to the entire Stated Death Benefit. For us to approve a change to the death benefit option from Option 1 to Option 2, or from Option 1 to Option 3, you must submit evidence to us that the Insured is insurable according to our normal rules of underwriting for that class of policy. We may not allow any change if it would reduce the Stated Death Benefit below the minimum we require to issue this Policy at the time of reduction. After the Effective Date of the change, the Stated Death Benefit will be changed according to the following table: OPTION CHANGE FROM TO STATED DEATH BENEFIT FOLLOWING CHANGE EQUALS: Option 1 Option 2 Stated Death Benefit prior to such change minus your Account Value as of the Effective Date of the change. Option 2 Option 1 Stated Death Benefit prior to such change plus your Account Value as of the Effective Date of the change. Option 1 Option 3 Stated Death Benefit prior to such change minus the sum of the Premiums paid minus Partial Withdrawals taken as of the Effective Date of the change. Option 3 Option 1 Stated Death Benefit prior to such change plus the sum of the Premiums paid minus Partial Withdrawals taken as of the Effective Date of the change. Option 2 Option 3 Stated Death Benefit prior to such change plus i) your Account Value as of the Effective Date of the change, minus ii) the sum of the Premiums paid minus Partial Withdrawals taken as of the Effective Date of the change. Option 3 Option 2 Stated Death Benefit prior to such change plus i) the sum of the Premiums paid minus Partial Withdrawals taken as of the Effective Date of the change, minus ii) your Account Value as of the Effective Date of the change. For purposes of death benefit option changes, your Account Value will be allocated to each coverage segment in the same proportion that the Stated Death Benefit of that segment bears to the sum of all Stated Death Benefit segments as of the Effective Date of change. PREMIUM PROVISIONS SCHEDULED PREMIUMS The Scheduled Premium as shown in the Schedule may be paid while this Policy is in force during the Insured's lifetime. You may increase or decrease the amount of the Scheduled Premium, subject to limits we may set and provisions in the Premium Limitation Section. Under conditions provided in the Grace Period provision and the Guarantee Period, you may be required to make Premium payments to keep the Policy in force. We will send reminder notices to you for the Scheduled Premium amount and frequency that you have selected. You may select to receive notices either annually, semiannually or quarterly. You may also arrange for payment of Premiums on a monthly basis through an authorized special payment facility. All payment modes are subject to our minimum requirements for the payment mode selected. UNSCHEDULED PREMIUMS You may make unscheduled Premium payments at any time the Policy is in force during the Insured's lifetime. The unscheduled Premium payment must be at least $100. We may change this minimum if we give you 90 days written notice. Unless you tell us otherwise, these Premium payments will first be applied to reduce or pay off any existing Policy Loan and, as such, Premium Expense Charges will not be deducted. We may limit the amount of such unscheduled Premium payments if the payment would result in an increase in the Base Death Benefit. If the net amount at risk is increased as a result of an unscheduled Premium, we will require evidence of insurability satisfactory to us that the Insured is insurable according to our normal rules of underwriting for this type of Policy. The net amount at risk is the difference between the Base Death Benefit and your Account Value. PREMIUM LIMITATION If the Definition of Life Insurance test used for your Policy is the Guideline Premium Test, we will not accept any Premium that causes your Policy not to qualify as a life insurance policy under the Internal Revenue Code. PREMIUM ALLOCATION During the Right to Examine Policy Period, the portion of your Net Premium which you have elected to invest in a Division of the Variable Account will be invested in the [Fidelity Investments Money Market Division]. After the Right to Examine Policy Period, the balance of your funds in the [Fidelity Investments Money Market Division] will be reallocated as you directed in your Premium allocation shown in the Schedule. After the Right to Examine Policy Period, each Net Premium will be allocated to the Divisions of the Variable Account and the Guaranteed Interest Division as you directed in the application or as otherwise requested. You may change the allocation for subsequent Premiums by sending us written notice at our Customer Service Center. If you change your Premium allocation more than 5 times per Policy year, we will deduct a charge from the Divisions of the Variable Account and the Guaranteed Interest Division in the same proportion that your Account Value of each Division bears to your net Account Value. The amount of this charge is shown in the Schedule. Premium allocation percentages may be in any whole number from 1% to 100% provided that at least $100 is allocated to each Division selected. VARIABLE ACCOUNT PROVISIONS THE VARIABLE ACCOUNT The Variable Account is an account established by us, pursuant to the laws of the State of Colorado, to separate the assets funding the benefits for the class of policies to which this Policy belongs from the other assets of Security Life of Denver. The Variable Account is registered as a unit investment trust under the Investment Company Act of 1940. All income, gains and losses, whether or not realized, from assets allocated to the Variable Account are credited to or charged against the Variable Account without regard to income, gains or losses of our General Account. The assets of the Variable Account are our property but are separate from our General Account and our other Variable Accounts. That portion of the assets of the Variable Account which is equal to the reserves and other Policy liabilities with respect to the Variable Account is not subject to creditor claims against us. VARIABLE ACCOUNT DIVISIONS The Variable Account is divided into Divisions, each of which invests in a series fund Portfolio designed to meet the objectives of the Division. The current eligible Divisions are shown in the Schedule. We may, from time to time, add additional Divisions. If we do, you may be permitted to select from these other Divisions subject to the terms and conditions we may impose on those allocations. CHANGES WITHIN THE VARIABLE ACCOUNT When permitted by law, and subject to any required notice to you and approval of the Securities and Exchange Commission ("SEC"), state regulatory authorities or Policy Owners, we may from time to time make the following changes to the Variable Account: . Make additional Divisions available. These Divisions will invest in investment Portfolios we find suitable for the Policy. . Eliminate Divisions from the Variable Account, combine 2 or more Divisions, or substitute a new Portfolio for the Portfolio in which a Division invests. A substitution may become necessary if, in our judgment, a Portfolio no longer suits the purposes of the Policy. This may happen due to a change in laws or regulations, or a change in a Portfolio's investment objectives or restrictions. This may also happen if the Portfolio is no longer available for investment, or for some other reason, such as a declining asset base. . Transfer assets of the Variable Account, which we determine to be associated with the class of Policies to which your Policy belongs, to another Variable Account. . Withdraw the Variable Account from registration under the Investment Company Act of 1940. . Operate the Variable Account as a management investment company under the Investment Company Act of 1940. . Cause one or more Divisions to invest in a mutual fund other than or in addition to the Portfolios. . Discontinue the sale of Policies and certificates. . Terminate any employer or plan trustee agreement with us pursuant to its terms. . Restrict or eliminate any voting rights as to the Variable Account. . Make any changes required by the Investment Company Act of 1940 or the rules or regulations thereunder. Form 1197 (VUL)- TX Page 12 GENERAL ACCOUNT PROVISIONS THE GENERAL ACCOUNT The General Account holds all of our assets other than those held in the Variable Account or our other separate accounts. The Guaranteed Interest Division is a part of our General Account. GUARANTEED INTEREST DIVISION The Guaranteed Interest Division is another Division to which you may allocate Premiums or make transfers. The Account Value of the Guaranteed Interest Division is equal to the Net Premium allocated to this Division plus any earned interest minus deductions taken from this Division. Interest is credited at the guaranteed rate shown in the schedule or may be credited at a higher rate. Any higher rate is guaranteed to be in effect for at least 12 months. LOAN DIVISION The Loan Division is the account which is set aside to secure the Policy Loan, if any. See the Loan Provision section for information. TRANSFER PROVISIONS After the Right to Examine Policy Period, your Account Value in each Division may be transferred to any other Division of the Variable Account upon written request. Transfers from the Guaranteed Interest Division are subject to the limitations as described in the Guaranteed Interest Division provision. The number of free transfers permitted in any one Policy year without an Excess Transfer Charge, the total number of transfers permitted and the Excess Transfer Charge are shown in the table below. Any transfers made due to the operation of the Automatic Rebalancing Feature or Dollar Cost Averaging will not count toward the transfers allowed free of charge. The minimum amount that may be transferred from each Division is the lesser of $100 or the balance of a Division. The following table summarizes the number of transfers available and the associated charges during any Policy year.
- ----------------------------------------------------------------------------------------------------- Free Transfers 12 - ----------------------------------------------------------------------------------------------------- Total Number of Transfers Permitted Unlimited - ----------------------------------------------------------------------------------------------------- Excess Transfer Charge $25 for each transfer in excess of 12 during any Policy year. - -----------------------------------------------------------------------------------------------------
TRANSFERS TO OR FROM THE GUARANTEED INTEREST DIVISION Once during the first 30 days of each Policy year, you may transfer amounts from the Guaranteed Interest Division. Transfer requests received within 30 days prior to the Policy anniversary will be deemed to occur as of the Policy anniversary. Transfer requests received on the Policy anniversary or within the following 30 days will be processed; transfer requests received at any other time will not be processed. Transfers of your Account Value to the Guaranteed Interest Division are not limited to this 30-day period. The maximum transfer amount from the Guaranteed Interest Division in any Policy year is the greatest of: Form 1197 (VUL) Page 13 a) 25% of your Account Value in the Guaranteed Interest Division at the time of the first transfer or withdrawal in a Policy year; b) The minimum transfer amount; or c) The sum of the amounts transferred and withdrawn from the Guaranteed Interest Division in the prior Policy year. For purposes of calculating the maximum transfer from the Guaranteed Interest Division, all Partial Withdrawals and transfers from the Guaranteed Interest Division in a Policy year are summed. EXCESS TRANSFER CHARGE If you exceed the number of free transfers allowed, you will be assessed an Excess Transfer Charge. This charge will be deducted from each of the Divisions in which you are invested in the same proportion that the amount of Account Value in that Division bears to the net Account Value immediately after the transfer. DOLLAR COST AVERAGING If you have at least $10,000 of Account Value in either the [Fidelity Investments Money Market Division] or the [Neuberger & Berman Limited Maturity Bond Division], you may choose to transfer a specified dollar amount each month from one of these Divisions to other Divisions of the Variable Account. Dollar Cost Averaging transfers may not be made to the Guaranteed Interest Division. The minimum amount that you may elect to transfer each month is $100. The maximum amount that you may transfer is equal to your Account Value in the Division from which the transfer is taken when the election is made, divided by 12. Dollar Cost Averaging may be elected to end on a specified date or when a specific balance remains in the [Fidelity Investments Money Market Division] or the [Neuberger & Berman Limited Maturity Bond Division]. Percentage allocations of the transfer amount must be designated as whole number percentages; no specific dollar designation may be made to the Divisions of the Variable Account. If you elect to transfer to a particular Division, the minimum percentage that may be transferred to that Division is 1% of the total amount transferred provided that the allocation is at least $100. The transfer date will be the same calendar day each month as the Monthly Processing Date. If this calendar day is not a Valuation Date, the next Valuation Date will be used. If, on any transfer date, your Account Value in the chosen Division is equal to or less than the amount you have elected to have transferred, the entire amount will be transferred, and this option will end. Dollar Cost Averaging may not begin until the Monthly Processing Date following the end of the Right to Examine Policy Period. You may change the transfer amount or the Divisions to which transfers are to be made once each Policy year. You may cancel this election by sending us written notice at our Customer Service Center at least 7 days before the next transfer date. Any transfer under this option will not be included for purposes of the Excess Transfer Charge. If you elect both Dollar Cost Averaging and Automatic Rebalancing, Dollar Cost Averaging will occur first. On the first Valuation Date of the next calendar quarter after Dollar Cost Averaging has terminated, Automatic Rebalancing will begin. Form 1197 (VUL) Page 14 AUTOMATIC REBALANCING Automatic Rebalancing allows you to match your Account Value in each Division to your allocation percentage for new Premiums. Automatic Rebalancing can be elected in your application or by completing the Automatic Rebalancing form and returning it to our Customer Service Center. As of the first Valuation Date of each calendar quarter thereafter we will reallocate your Net Account Value so that the amount in each Division matches your Premium allocation. Automatic Rebalancing may not begin until the of the Right to Examine Policy Period. While this feature is in effect, we require that you allocate no more than 35% of your Premiums to any one Division, and you must allocate your Premiums to at least 5 Divisions. If at any time during the operation of the Automatic Rebalancing feature you request a change in Premium allocation which does not meet these requirements, we will notify you that your allocation must be changed. We will not process such a request unless you also request that the Automatic Rebalancing feature be discontinued. When you request a change in Premium allocation that meets these requirements, your Net Account Value will be reallocated as of the Valuation Date that we receive your written allocation instructions. Amounts will be transferred among the Divisions to match the allocation for new Premiums. During the operation of Automatic Rebalancing, you may not change your allocation percentage to the Guaranteed Interest Division by more than 25% of the percentage previously allocated to the Guaranteed Interest Division. If you change your Premium allocation more than five times per Policy year, there will be a $25 charge taken from your Account Value. This charge will be deducted from each of the Divisions of the Variable Account and the Guaranteed Interest Division in the same proportion that your Account Value of each Division bears to your net Account Value as of the Valuation Date the allocation change is effective. Any transfer as a result of the operation of Automatic Rebalancing will not be included in determining if the Excess Transfer Charge will apply. You may not transfer among Divisions while the Automatic Rebalancing feature is in effect. If you elect both Dollar Cost Averaging and Automatic Rebalancing, Dollar Cost Averaging will occur first. On the first Valuation Date of the next calendar quarter after Dollar Cost Averaging has terminated, Automatic Rebalancing will begin. ACCOUNT VALUE PROVISIONS The Account Value is the sum of the current amounts allocated to the Divisions of the Variable Account and to the Guaranteed Interest Division plus your balance in the Loan Division. The Account Value is based on the amount and number of Premiums paid, Policy and rider charges assessed, loans and withdrawals taken, monthly deductions, Premium Expense Charges, transaction charges, any Surrender Charges and the investment experience or credited interest of the Division to which your Account Value is allocated. Your net Account Value is equal to your Account Value minus any Policy Loan and accrued but unpaid loan interest. Form 1197 (VUL) Page 15 NET PREMIUM The Net Premium equals the Premium paid minus the Premium Expense Charges for taxes and the appropriate Sales Load shown in the Schedule. Premiums allocated to an increase in coverage will be subject to a new Sales Load. Premiums are allocated in the same proportion that the Guideline Annual Premium of each segment bears to the sum of the Guideline Annual Premiums of all segments. The Guideline Annual Premium for each coverage segment is shown in the Schedule. ACCOUNT VALUES ON THE INVESTMENT DATE The Account Value of each Division of the Variable Account and the Guaranteed Interest Division as of the Investment Date is equal to: a) The allocation to that Division of the first Net Premium paid (as determined by you); minus b) The portion of any monthly deductions due on the Investment Date allocated to that Division. The Account Value of the Loan Division as of the Investment Date is equal to zero. ACCUMULATION UNIT VALUE The investment experience of a Division of the Variable Account is determined as of each Valuation Date. We use an Accumulation Unit Value to measure the experience of each of the Variable Account Divisions during a Valuation Period. We set the Accumulation Unit Value at $10 on the Valuation Date when the first investments in each Division of the Variable Account are made. The Accumulation Unit Value for a Valuation Period equals the Accumulation Unit Value for the preceding Valuation Period multiplied by the Accumulation Experience Factor for the Valuation Period. The number of units for a given transaction related to a Division of the Variable Account as of a Valuation Date is determined by dividing the dollar value of that transaction by that Division's Accumulation Unit Value for that date. ACCUMULATION EXPERIENCE FACTOR For each Division of the Variable Account, the Accumulation Experience Factor reflects the investment experience of the Portfolio in which that Division invests and the charges assessed against that Division for a Valuation Period. The Accumulation Experience Factor is calculated as follows: a) The net asset value of the Portfolio in which that Division invests as of the end of the current Valuation Period; plus b) The amount of any dividend or capital gains distribution declared and reinvested in the Portfolio in which that Division invests during the current Valuation Period; minus c) A charge for taxes, if any. d) The result of (a), (b) and (c) divided by the net asset value of the Portfolio in which that Division invests as of the end of the preceding Valuation Period; minus e) The daily equivalent of the Annual Mortality and Expense Risk Charge shown in the Schedule for each day in the current Valuation Period. Form 1197 (VUL) Page 16 ACCOUNT VALUE OF THE DIVISIONS OF THE VARIABLE ACCOUNT On subsequent Valuation Dates after the Investment Date, your Account Value of each Division of the Variable Account is calculated as follows: a) The number of Accumulation Units in that Division as of the beginning of the current Valuation Period multiplied by that Division's Accumulation Unit Value for the current Valuation Period; plus b) Any additional Net Premiums allocated to that Division during the current Valuation Period; plus c) Any Account Value transferred to or minus any Account Value transferred from the Variable Division during the current Valuation Period (including the applicable portion of any transfer fee); minus d) Any Partial Withdrawals allocated to that Division and any applicable withdrawal service fees which are allocated to the Variable Division during the current Valuation Period; plus e) Any amounts released from the Loan Division as a result of a loan or loan interest payment, or minus amounts transferred to the Loan Division as of a result of any loans which are allocated to the Variable Division during the current Valuation Period; minus f) The portion of any Surrender Charge resulting from a decrease in Stated Death Benefit allocated to the Division; minus g) The portion of the monthly deduction allocated to the Variable Division, if a Monthly Processing Date occurs during the current Valuation Period. ACCOUNT VALUE OF THE GUARANTEED INTEREST DIVISION On Valuation Dates after the Investment Date, your Account Value of the Guaranteed Interest Division is calculated as follows: a) The Account Value of the Guaranteed Interest Division at the end of the preceding Valuation Period plus interest at the declared rate credited during the current Valuation Period; plus b) Any additional Net Premiums allocated to the Guaranteed Interest Division plus interest credited to these Premiums during the current Valuation Period; plus c) Any account Value transferred to or minus any Account Value transferred from the Guaranteed Interest Division during the current Valuation Period (including the applicable portion of any transfer fee); minus d) Any Partial Withdrawals taken and any applicable withdrawal service fees which are allocated to the Guaranteed Interest Division during the current Valuation Period; plus e) Any amounts released from the Loan Division as a result of a loan or loan interest payment, or minus amounts transferred to the Loan Division as of a result of any loans which are allocated to the Guaranteed Interest Division during the current Valuation Period; minus f) The portion of any Surrender Charge resulting from a decrease in Stated Death Benefit allocated to the Guaranteed Interest Division, minus g) The portion of the monthly deduction allocated to the Division, if a Monthly Processing Date occurs during the current Valuation Period. ACCOUNT VALUE OF THE LOAN DIVISION On Valuation Dates after the Investment Date, your Account Value of the Loan Division is equal to: a) The Account Value of the Loan Division on the prior Valuation Date; plus b) Any interest credited to the Loan Division during the Valuation Period; plus c) An amount equal to any additional loans since the prior Valuation Date; minus d) Any loan repayments, including payment of loan interest in cash; plus Form 1197 (VUL) Page 17 e) The amount of accrued loan interest if the Valuation Date is a Policy anniversary; minus f) The amount of interest credited to the Loan Division during the year if the Valuation Date is a Policy anniversary. On Policy anniversaries, any amount of interest credited to the Loan Division during the year is transferred from the Loan Division to the Variable Account and Guaranteed Interest Divisions in the same proportion that your Account Value in each Variable Division and the Guaranteed Interest Division bears to your net Account Value as of the Policy anniversary. MONTHLY DEDUCTION AND REFUND MONTHLY DEDUCTION The monthly deduction is equal to: a) the cost of insurance charges for this Policy; plus b) the monthly charges for any other additional benefits provided by rider; plus c) the monthly expense charges shown in the Schedule. The monthly deductions allocated to the Divisions of the Variable Account and Guaranteed Interest Division in the same proportion that your Account Value in the Division bears to your net Account Value as of the Monthly Processing Date. This deduction is taken from your Account Value as of the Monthly Processing Date. COST OF INSURANCE The cost of insurance is determined on a monthly basis for each coverage segment. Such cost is the monthly cost of insurance rate for the Insured's Premium Class multiplied by the net amount at risk. The net amount at risk is (a) minus (b) where: a) is the Base Death Benefit for all coverage segments as of the Monthly Processing Date after the monthly deductions (other than cost of insurance charges for the Base Death Benefit, any Adjustable Term Insurance Rider and any Waiver of Monthly Deductions Rider), divided by 1 plus the monthly equivalent of the Guaranteed Interest Rate for the Guaranteed Interest Division as shown in the Schedule; and b) is your Account Value as of the Monthly Processing Date after the monthly deductions (other than the cost of insurance for the Base Death Benefit, any Adjustable Term Insurance Rider and any Waiver of Monthly Deduction Rider). The cost of insurance rates will be determined by us from time to time. They will be based on the sex and Age as of the Effective Date of coverage, the duration since the coverage began and the Premium Class. Any change in rates will apply to all individuals of the same Premium Class and whose policies have been in effect for the same length of time. The rates will never exceed those rates shown in the Table of Guaranteed Rates in the Schedule as adjusted for any special Premium Class. Each time there is a new coverage segment of Stated Death Benefit due to a requested increase, the net amount at risk will be allocated to each coverage segment in the same proportion that the Stated Death Benefit of that segment bears to the total Policy Stated Death Benefit. Different rates will apply to each segment depending upon the Premium Class, the Age as of the Effective Date of the increase and the duration since the Effective Date of the increase. Form 1197 (VUL) Page 18 PERSISTENCY REFUND Each month your Policy or a coverage segment of Stated Death Benefit remains in force after its tenth Policy anniversary, we will credit your Account Value with a refund equivalent to 0.5% of your Account Value on an annual basis for that segment (0.04167% monthly). Your Account Value will be allocated to each coverage segment based upon the number of completed Policy years the segment has been in force and the size of the Guideline Annual Premium for the segment as shown in the Schedule. The persistency refund will be added to the Divisions of the Variable Account and the Guaranteed Interest Division in the same proportion that your Account Value in each Division bears to your net Account Value as of the Monthly Processing Date. LOAN PROVISIONS POLICY LOANS You may obtain a Policy Loan after the first Policy anniversary. The maximum amount you may borrow at any time equals (a) minus (b) where (a) is equal to: 1. Account Value minus (12 times the current monthly deduction); 2. Multiplied by (1 + Policy Loan Interest Rate); 3. Divided by (1 + Guaranteed Interest Rate credited to Loan Division); and where (b) is equal to any outstanding Policy Loan and accrued loan interest. However, at no time will the Policy Loan amount be less than 90% of the Cash Surrender Value; minus any outstanding Policy Loan and accrued but unpaid interest. The Policy Loan is a first lien on your Policy. The minimum amount you may borrow is shown in the Schedule. The outstanding Policy Loan amount is equal to the loan amount as of the beginning of the Policy year plus new loans and minus loan repayments. LOAN INTEREST The annual Policy Loan interest rate is shown in the Schedule. If a loan is made, interest is due and payable at the end of the Policy year. Thereafter, interest on the loan amount is due annually at the end of each Policy year until the loan is repaid. If interest is not paid when due, it is added to the Policy Loan. If the Policy Loan amount plus any accrued interest equals or exceeds the Cash Surrender Value, a Premium sufficient to keep this Policy in force must be paid as provided in the Grace Period provision. Form 1197 (VUL) Page 19 LOAN DIVISION When a Policy Loan is taken or when interest is not paid in cash when due, an amount equal to the loan is transferred from the Divisions of the Variable Account and the Guaranteed Interest Division to the Loan Division to secure the loan. This amount will be deducted from the Divisions of the Variable Account and the Guaranteed Interest Division in the same proportion that your Account Value in each Division bears to your net Account Value as of the date the transfer is effective. Your Account Value in the Loan Division will be credited with interest at the interest rate for the Loan Division shown in the Schedule. When a loan repayment is made an amount equal to the repayment is transferred from the Loan Division to the Guaranteed Interest Division and the Divisions of the Variable Account in the same proportion as your current Premium allocation unless you request a different allocation. PARTIAL WITHDRAWAL PROVISIONS You may apply for a Partial Withdrawal of your Account Value on any Monthly Processing Date after the first Policy anniversary by writing to us at our Customer Service Center. The minimum and maximum Partial Withdrawal amounts are shown in the Schedule. When a Partial Withdrawal is made, the amount of the withdrawal plus a service fee is deducted from your Account Value. The amount of the service fee is shown in the Schedule. We limit the number of Partial Withdrawals in a Policy year and this number is shown in the Schedule. The Stated Death Benefit is not reduced by a Partial Withdrawal taken when the Base Death Benefit has been increased to qualify your Policy as life insurance under the Federal income tax laws and the amount withdrawn is no greater than that which reduces your Account Value to the level which no longer requires the Base Death Benefit to be increased for Federal income tax law purposes. For a Policy under an Option 1 death benefit, the Stated Death Benefit is not reduced by a Partial Withdrawal in the circumstances described above. In addition, if no more than 16 years have elapsed since the Policy date and the Insured is not yet Age 81, a Partial Withdrawal of an amount up to 10% of your Account Value or, if greater, 5% of the Stated Death Benefit, calculated immediately before the Partial Withdrawal is taken will not reduce the State Death Benefit. Any additional amount withdrawn reduces your Stated Death Benefit by that additional amount. For a Policy under an Option 2 death benefit, a Partial Withdrawal does not reduce your Stated Death Benefit. For a Policy under an Option 3 death benefit, your Stated Death Benefit will be reduced by any amount of the Partial Withdrawal in excess of Premiums paid to the date of the Partial Withdrawal. Any reduction in death benefit or Account Value will occur as of the date the Partial Withdrawal occurs. No Partial Withdrawal will be allowed if the Stated Death Benefit remaining in force after any such Partial Withdrawal would be reduced below the minimum Stated Death Benefit shown in the Schedule. For a Policy under an Option 2 or Option 3 death benefit, a Partial Withdrawal reduces the Base Death Benefit by the amount of the withdrawal. Under any death benefit option, if the Base Death Benefit has been increased in order to qualify your Policy as a life insurance contract under the Federal income tax laws, the Partial Withdrawal reduces the Base Death Benefit by an amount greater than the withdrawal. Form 1197 (VUL) Page 20 If the Stated Death Benefit is reduced during the first 7 years of a coverage segment, a new Target Premium will be calculated and future maximum Surrender Charges will be reduced. If the Stated Death Benefit is reduced after the first 7 years of a coverage segment, the Surrender Charge is reduced in the same proportion that the Stated Death Benefit is reduced. You may specify how much of the withdrawal you wish taken from each Division of the Variable Account or from the Guaranteed Interest Division. You may not withdraw from the Guaranteed Interest Division more than the total withdrawal times the ratio of your Account Value in the Guaranteed Interest Division to your Net Account Value immediately prior to the withdrawal. Unless you indicate otherwise, we will make the withdrawal from the amounts in the Guaranteed Interest Division and the Divisions of the Variable Account in the same proportion that your Account Value in each Division bears to your Net Account Value immediately prior to the withdrawal. The withdrawal service fee and any Surrender Charge deducted from your Account Value is deducted from each Variable Division and the Guaranteed Interest Division in the same proportion that your Account Value of each division bears to your Net Account Value immediately after the withdrawal. We may send you a new Schedule to reflect the effect of the withdrawal, including any change to the Stated Death Benefit. We may ask you to return your Policy to our Customer Service Center to make this change. The withdrawal and the reductions in death benefits will be effective as of the Valuation Date after we received your request. SURRENDER PROVISIONS SURRENDER VALUE The net Cash Surrender Value on any date will be your Account Value minus any applicable Surrender Charge and minus any Policy Loan including accrued but unpaid loan interest. SURRENDER CHARGES A separate Surrender Charge will apply to each Stated Death Benefit coverage segment. The Surrender Charge for this Policy is the sum of the Surrender Charge for each coverage segment of Stated Death Benefit. The Surrender Charge will not exceed the total maximum Surrender Charge shown in the Schedule. For purposes of calculating the Surrender Charge for a coverage segment, Premiums are allocated to a segment in the same proportion that the Guideline Annual Premium of each segment bears to the sum of the Guideline Annual Premiums of all segments. The Guideline Annual Premium for each coverage segment is shown in the Schedule. For each segment, the Surrender Charge consists of an administrative Surrender Charge and a sales Surrender Charge. The administrative Surrender Charge for each segment is determined from the administrative Surrender Charge table in the Schedule. It depends on the segment's Issue Age, Effective Date and initial Stated Death Benefit which are in the Schedule. For the first 7 Policy years following the Effective Date of a segment, the sales Surrender Charge is the lesser of: 50% of the target Premium for the segment; or 25% of the sum of all Premiums paid up to the target Premium for the segment plus 5% of the sum of all Premiums paid in excess of the target Premium for the segment. Thereafter, the sales Surrender Charge for the segment decreases at the beginning of each year following the 7th Policy year from the Effective Date of the segment by 12.5% of the sales Surrender Charge in effect at the end of the 7th Policy Year until it reaches zero at the beginning of the 15th Policy year following the segment's Effective Date or the Policy year the Insured reaches age 98, whichever is sooner. Form 1195 (VUL) Page 21 During the first 14 Policy years or within 14 years of the Effective Date of an increase in the Stated Death Benefit segment, if you request a decrease to the Stated Death Benefit or take a Partial Withdrawal which causes the Stated Death Benefit to decrease, the administrative Surrender Charge will decrease in the same proportion that the Stated Death Benefit decreases. Upon a decrease in the Stated Death Benefit, a portion of the Surrender Charge will be deducted from your Account Value. The amount of the Surrender Charge which will be deducted from your Account Value will equal the Surrender Charge in effect before the decrease minus the Surrender charge in effect after the decrease. If a decrease to the Stated Death Benefit occurs after the first 7 years of a coverage segment, the maximum Surrender Charges for the remaining Policy will be reduced by the percentage that the Stated Death Benefit is decreased. If a decrease occurs during the first 7 years of a coverage segment, the Target Premium will be recalculated; future maximum Surrender Charges for that coverage segment will be reduced. A Surrender Charge is not deducted from your Account Value if the Stated Death Benefit is decreased because the death benefit option is changed. BASIS OF COMPUTATIONS The Cash Surrender Value under the Policy is not less than the minimums required as of the Policy date by the state in which your Policy was delivered. A detailed statement of the method of computation of Policy values under the Policy has been filed with the insurance department of the state in which the Policy was delivered, if required. FULL SURRENDERS You may surrender your Policy after the Right to Examine Policy Period or at any time during the lifetime of the Insured and receive the net Cash Surrender Value. We will compute the net Cash Surrender Value as of the next Valuation Date after we receive both your request and the Policy at our Customer Service Center. This Policy will be canceled as of the date we receive your request, and there will be no further benefits under this Policy. GRACE PERIOD, TERMINATION AND REINSTATEMENT PROVISIONS GRACE PERIOD If the following conditions occur on a Monthly Processing Date, the Policy will enter into the 61 day Grace Period: a) The net Cash Surrender Value is zero or less; and b) The Guarantee Period shown in the Schedule and described below has expired or been terminated, and c) The three year continuation period described below has expired or the required Premium for the three year continuation period has not been paid. We will give you a 61 day Grace Period from this Monthly Processing Date to make the required Premium payment. The required Premium payment then due must be paid to keep the Policy in force. If this amount is not received in full by the end of the Grace Period, the Policy will lapse without value. The required Premium payment will be equal to past due charges plus an amount we expect to be sufficient to keep the Policy and any riders in force for 2 months following the receipt of the required Premium payment. If we receive at least the required Premium payment during the Grace Period we will make deductions from the Net Premium payment for the past due amounts and apply any remaining amounts as Premium to the Policy. Form 1197 (VUL) Page 22 Notice of the amount of the required Premium payment will be mailed to you or any assignee at the last known address at least 30 days before the end of the Grace Period. If the Insured dies during the Grace Period, we will deduct any overdue monthly deductions from the death Proceeds of the Policy. THREE YEAR CONTINUATION PERIOD During the first 3 Policy years, if at all times the sum of your Premiums paid minus the sum of your Partial Withdrawals, Policy Loans taken and accrued but unpaid interest, is greater than or equal to: one-twelfth of the Minimum Annual Premium multiplied by the number of complete months your Policy has been in force, your Policy will remain in force regardless of the net Cash Surrender Value. The Minimum Annual Premium is shown in the Schedule. If you increase the Stated Death Benefit during the first 3 Policy years, the new Schedule will show a revised Minimum Annual Premium which will be used for future tests to determine if your Policy will remain in force under this provision. TERMINATION All coverage provided by this Policy will end as of the earliest of: a) The date the Policy is surrendered; b) The date of death of the Insured; c) The Maturity Date of the Policy; or d) The date the Grace Period ends without payment of the required Premium. REINSTATEMENT The Policy may be reinstated within five years after the beginning of the Grace Period. The reinstatement will be effective as of the Monthly Processing Date on or next following the date we approve your written application. We will reinstate the Policy and any riders if the following conditions are met: a) You have not surrendered the Policy for its net Cash Surrender Value; b) You submit evidence satisfactory to us that the Insured and those insured under any riders are still insurable according to our normal rules of underwriting for this type of Policy; and c) We receive payment of the amount of Premium sufficient to keep the Policy and any riders in force from the beginning of the Grace Period to the end of the expired Grace Period and for 2 months after the date of reinstatement. We will let you know, at the time you request reinstatement, the amount of Premium needed for this purpose. The Surrender Charge as of the date of reinstatement will equal the Surrender Charge as of the beginning of the Grace Period. We will reinstate any Policy Loan, with accrued loan interest to the end of the Grace Period, which existed when coverage ended. Upon reinstatement, the Net Premium received minus past due amounts will be allocated to the Divisions of the Variable Account and the Guaranteed Interest Division according to the Premium allocation percentages in effect at the start of the Grace Period or as directed by you in writing at the time of reinstatement. Form 1197 (VUL) - TX Page 23 DEFERRAL OF PAYMENT Requests for transfers, withdrawals, payment of proceeds on the Maturity Date or a full surrender will be processed within 7 days of receipt of the request in a form acceptable to us. However, we may postpone the processing of any such Variable Account transactions for any of the following reasons: a) The NYSE is closed, other than customary weekend and holiday closings. b) Trading on the NYSE is restricted by the SEC. c) The SEC declares that an emergency exists as a result of which disposal of securities in the Variable Account is not reasonably practicable to determine your Account Value in the Divisions. d) A governmental body having jurisdiction over the Variable Account by order permits such suspension. Rules and regulations of the SEC, if any, are applicable and will govern as to whether conditions described in (b), (c), or (d) exist. Death proceeds will be paid within 7 days of determination of the proceeds and are not subject to deferment. We may defer for up to 6 months payment of any surrender proceeds, withdrawal or loan amounts from the Guaranteed Interest Division. GENERAL POLICY PROVISIONS THE POLICY The Policy, including the original application and applications for an increase, riders, endorsements, any Schedule pages, and any reinstatement applications make up the entire contract between you and us. A copy of the original application will be attached to the Policy at issue. A copy of any application as well as a new Schedule will be attached or furnished to you for attachment to the Policy at the time of any change in coverage. In the absence of fraud, all statements made in any application will be considered representations and not warranties. No statement will be used to deny a claim unless it is in an application. AGE The Policy is issued at the Age shown in the Schedule. This is the Insured's Age nearest birthday on the Policy date. The Insured's Age at any time is the Age shown in the Schedule increased by the number of completed Policy years. PROCEDURES We must receive any election, designation, assignment or any other change request you make in writing, except those specified on the application. It must be in a form acceptable to us. We may require a return of the Policy for any change or for a full surrender. We are not liable for any action we take before we receive and record the written request at our Customer Service Center. In the event of the death of the Insured before the Maturity Date, please let us or our agent know as soon as possible. Claim procedure instructions will be sent to the Beneficiary immediately. We may require proof of Age and a certified copy of the death certificate. We may require the Beneficiary and next of kin to sign authorizations as part of due proof. These authorization forms allow us to obtain information about the Insured, including, but not limited to, medical records of physicians and hospitals used by the Insured. Form 1197 (VUL Page 24 EX-1.A(5)(B) 7 EXHIBIT 1.A(5) (B) EXHIBIT 1.A(5)(b) ADJUSTABLE TERM INSURANCE RIDER This Rider is a part of the policy to which it is attached if this Rider is shown in the Schedule. This Rider must be read with all Policy provisions. This Rider does not participate in our surplus earnings. This Rider has no loan provision or Cash Surrender Value. The Rider effective date is the Policy Date, if added later, the Monthly Processing Date on or next following the date your application for this Rider is approved by us. THE DEATH BENEFIT. Subject to all the Rider's terms and upon receipt of due proof that the Insured died while this Rider was in force, we will determine the benefit payable to the Beneficiary which will provide the Target Death Benefit. The amount of the term death benefit is the difference, at the time of the determination of Death Proceeds, between the Target Death Benefit and the Base Death Benefit provided by the Policy. In no event will this benefit be less than zero. The term death benefit is not increased or decreased by Policy Loan activity. For example, if the Target Death Benefit is $100,000 at the time of determination and the Base Death Benefit is $60,000 at the time of determination, this Rider's death benefit is $40,000. The Target Death Benefit is shown in the Schedule attached to your Policy. It may be a constant amount or it may change at the beginning of a Policy year. At issue, the maximum amount of Target Death Benefit is equal to five times the Stated Death Benefit of your Policy. The Target Death Benefit may be reduced if there is a Partial Withdrawal. If a Partial Withdrawal reduces the Stated Death Benefit of your Policy, the Target Death Benefit for the current year and all future years will be reduced by an amount equal to the reduction in the Stated Death Benefit and you will receive a new Schedule reflecting the new Target Death Benefit. See your Policy for details. The Stated Death Benefit provided by your Policy is defined in your Policy. DEFINITIONS. The Insured means the person Insured under the Policy to which this Rider is attached. SURRENDER CHARGE. There is no Surrender Charge applicable to this Rider. COST OF INSURANCE. The cost of insurance for this Rider is determined on a monthly basis. The cost is added to the Policy's monthly deduction from the Account Value as of each Monthly Processing Date until this Rider terminates. The cost of insurance rates will be determined by us from time to time. They will be based on the issue Age and Premium Class of the Insured, as well as the duration since the Policy Date. The cost of insurance for this Rider is calculated as the monthly cost of insurance rate multiplied by the death benefit (in thousands) or the Rider. The monthly guaranteed maximum cost of insurance rates per $1,000 for this Rider are shown in the Schedule on the Target Death Benefit Schedule attached to your Policy. OWNER. The Owner of the Policy is the Owner of this Rider. INCONTESTABILITY. After this Rider has been in force during the Insured's life for two years from the Policy Date, we will not contest the statements in the application for this Rider attached at the time the Rider is issued. After this Rider has been in force during the Insured's life for two years from the effective date of any increase in the amount of insurance, we will not contest the statements in the application for the increase. Form R2001-3/96 Page 1 After this Rider has been in force during the Insured's life for two years from the effective date of any reinstatement of the Rider, we will not contest the statements regarding the insured in the application for such reinstatement of this Rider. SUICIDE EXCLUSION. If the Insured commits suicide, while sane or insane, within two years of the Rider effective date, we will make a limited payment to the Beneficiary. We will pay in one sum the amount of the cost of insurance for this Rider which was deducted from the Account Value. If the insured commits suicide, while sane or insane, within two years of the effective date of any increase in the amount of insurance under this Rider, we will make a limited payment to the Beneficiary for the increase. This payment will equal the cost of insurance which was deducted from the Account Value for the increased portion of the death benefit. MISSTATEMENT OF AGE. If the Insured's Age has been misstated, any amount payable by us will be adjusted. The amount payable will be that which the cost of insurance which was deducted from the Account Value as of the last Monthly Processing Date prior to the death of the Insured would have purchased for the Insured's correct Age. CHANGE IN AMOUNT OF COVERAGE. On any Policy anniversary after the first Rider anniversary, the Target Death Benefit under this Rider may be changed. The Target Death Benefit may be increased or decreased by sending a written request to our Customer Service Center. Any request for increased death benefits will automatically be an increase to the Stated Death Benefit as well as to the Target Death Benefit unless you specifically request an increase to only the Target Death Benefit. You may increase or decrease the Target Death Benefit only once each Policy year. You may not increase insurance coverage provided by this Rider after the Insured is Age 85. Any change in coverage may not be for an amount less than $1,000. Such change is subject to the following conditions: a) Any requested decrease in Target Death Benefit is subject to our approval. Our approval may be conditioned on eliminating any future scheduled increases to the Target Death Benefit. b) Any request for an increase must be applied for on a supplemental application. The increase is subject to evidence satisfactory to us that the Insured is still insurable for the same Premium Class as this Policy according to our normal rules of underwriting for this type of Policy. An increase will also be subject to the existence of sufficient Net Cash Surrender Value to cover the monthly deduction for the next two months. c) For any increase or addition to coverage, the effective date will be the Policy anniversary that falls on or next follows the date the supplemental application is approved by us. For any decrease in coverage, the effective date will be the Policy anniversary that falls on or next follows receipt of the written request to reduce coverage. For any change in coverage, a supplemental schedule will be issued. DECREASE IN STATED DEATH BENEFIT. Any requested decrease in the Stated Death Benefit in the policy shall eliminate any future scheduled increases in the Target Death Benefit. We may choose not to eliminate these increases upon submission of evidence satisfactory to us that the insured is still insurable for the same Premium Class as this Policy according to our normal rules. TERMINATION. This Rider will terminate on the earliest of the following dates: 1. the expiration of the grace of the Policy; Form R2001-3/96 Page 2 2. the termination or surrender of the Policy; 3. the receipt by us of a written request from you to cancel this Rider on any Monthly Processing Date; 4. the Policy anniversary nearest the 100th birthday of the Insured. Any deduction for the cost of insurance after termination of this Rider will not be considered a reinstatement of this Rider nor a waiver by us of the termination. Any such deduction will be credited to the Account Value of the Policy as of the date of the deduction. REINSTATEMENT. If you reinstate you Policy under the reinstatement provisions provided in the Policy, this rider will be reinstated. Signed for the Company at Denver, Colorado SECURITY LIFE OF DENVER INSURANCE COMPANY /s/ Eugene L. Copeland SECRETARY Form R2001- 3/96 Page 3 EX-6 8 EXHIBIT 6 EXHIBIT 6 [LOGO OF SECURITY LIFE APPEARS HERE] April 17, 1997 Security Life of Denver Insurance Company 1290 Broadway Denver, CO 80203-5699 Re.: Security Life Separate Account L1 Post-Effective Amendment No. 2; SEC File No. 33-88148 Gentlemen: In my capacity as Variable Products Portfolio Manager and Actuarial Officer of Security Life of Denver Insurance Company ("Security Life"), I have provided actuarial advice concerning: . The preparation of Post-Effective Amendment No. 2 to the Registration Statement on Form S-6 (File No. 33-88148) to be filed by Security Life and its Security Life Separate Account L1 (the "Separate Account") with the Securities and Exchange Commission ("SEC") under the Securities Act of 1933 with respect to the "Strategic Advantage" variable universal life insurance policy; and . The preparation o the policy forms for the variable universal life insurance policy described in Post-Effective Amendment No. 2 (the "Policy"). It is my professional opinion that 1. The aggregate fees and charges under the Policy are reasonable in relation to the services rendered the expenses expected to be incurred and the risks assumed by Security Life. 2. The illustrations of death benefits, account value, cash surrender value, and total premiums paid plus interest at 5 percent shown in the Prospectus, based on the assumptions stated in the illustration are consistent with the provisions of the Policy. The rate structure of the Policy has not been designed so as to make the relationship between premiums and benefits, as shown in the illustrations included, appear to be correspondingly more favorable to prospective buyers than other illustrations which could have been provided at other combinations of ages, sex of the insured, death benefit option and amount, definition life insurance test, premium class, and premium amounts. Insureds of other premium classes may have higher costs of insurance charges. Security Life of Denver Insurance Company April 17, 1997 Page Two 3. All other numerical examples shown in the Prospectus are consistent with the Policy and our other practices, and have not been designed to appear more favorable to prospective buyers than other examples which could have been provided. I hereby consent to the filing of this opinion as an Exhibit to Post-Effective Amendment No. 2 to the Registration Statement and the use of my name under the heading "Experts" in the Prospectus. Sincerely, /s/: Shirley A. Knarr Shirley A. Knarr, FSA, MAAA SK:bjm EX-7 9 EXHIBIT 7 Exhibit 7 Consent of Independent Auditors We consent to the reference to our firm under the captions "Experts" and "Financial Statements" and to the use of our reports dated April 9, 1997 (with respect to the financial statements of Security Life Separate Account L1) and April 11, 1997 (with respect to the financial statements of Security Life of Denver Insurance Company), included in Post-Effective Amendment No. 2 to the Registration Statement (Form S-6 No. 33-88148) and related Prospectus of Security Life of Denver Insurance Company and Security Life Separate Account L1 dated May 1, 1997. /s/ Ernst & Young LLP ERNST & YOUNG LLP Denver, Colorado April 28, 1997 EX-8 10 EXHIBIT 8 EXHIBIT 8 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned, an officer and/or director of Security Life of Denver Insurance Company, a life insurance corporation organized and existing under the laws of Colorado, does hereby constitute and appoint John R. Barmeyer, Edward K. Campbell, Carol D. Hard, Shirley A. Knarr, and each of them, with full power of substitution as his true and lawful attorney and agent, to do any and all acts and things and to execute any and all instruments which said attorney and agent may deem necessary or advisable: (i) to enable the said corporation to comply with the Securities Act of 1993, as amended, the Investment Company Act of 1940, as amended, and any rules, regulations and requirements of the Securities and Exchange Commission in respect hereof, in connection with the registration under the said Securities Act and the Investment Company Act of variable life insurance contracts and variable annuity contracts of the said corporation (hereinafter collectively called "SLD Securities"), including specifically, but without limiting the generality of the foregoing, the power and authority to sign for and on behalf of the undersigned the name of the undersigned as officer and/or director of the said corporation to a registration statement or to any amendment thereto filed with the Securities and Exchange Commission in respect to said SLD Securities and to any instrument or document filed as part of, as an exhibit to or in connection with, said registration statement or amendment; and (ii) to register or qualify said SLD Securities for sale and to register or license said corporation or any subsidiary thereof as a broker or dealer in said SLD Securities under the securities or Blue Sky Laws of all such states as may be necessary or appropriate to permit therein the offering and sale of said SLD Securities as contemplated by said registration statement, including specifically, but without limiting the generality of the foregoing, the power and authority to sign for and on behalf of the undersigned the name of the undersigned as an officer and/or director of said corporation to any application, statement, petition, prospectus, notice or other instrument or document, or to any amendment thereto, or to any exhibit filed as a part thereto or in connection therewith, which is required to be signed by the undersigned and to be filed with the public authority or authorities administering said securities or blue sky laws for the purpose of so registering or licensing said corporation; and the undersigned does hereby ratify and confirm as his own act and deed all that said attorney and agent shall do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has subscribed these presents this 28th day of March, 1997. /s/ Stephen M. Christopher - --------------------------- In the Presence of: /s/ Shirley A. Knarr ---------------------- POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned, an officer and/or director of Security Life of Denver Insurance Company, a life insurance corporation organized and existing under the laws of Colorado, does hereby constitute and appoint John R. Barmeyer, Edward K. Campbell, Carol D. Hard, Shirley A. Knarr, and each of them, with full power of substitution as his true and lawful attorney and agent, to do any and all acts and things and to execute any and all instruments which said attorney and agent may deem necessary or advisable: (i) to enable the said corporation to comply with the Securities Act of 1933, as amended, the Investment Company Act of 1940, as amended, and any rules, regulations and requirements of the Securities and Exchange Commission in respect hereof, in connection with the registration under the said Securities Act and the Investment Company Act of variable life insurance contracts and variable annuity contracts of the said corporation (hereinafter collectively called "SLD Securities"), including specifically, but without limiting the generality of the foregoing, the power and authority to sign for and on behalf of the undersigned the name of the undersigned as officer and/or director of the said corporation to a registration statement or to any amendment thereto filed with the Securities and Exchange Commission in respect to said SLD Securities and to any instrument or document filed as part of, as an exhibit to or in connection with, said registration statement or amendment; and (ii) to register or qualify said SLD Securities for sale and to register or license said corporation or any subsidiary thereof as a broker or dealer in said SLD Securities under the securities or Blue Sky Laws of all such states as may be necessary or appropriate to permit therein the offering and sale of said SLD Securities as contemplated by said registration statement, including specifically, but without limiting the generality of the foregoing, the power and authority to sign for and on behalf of the undersigned the name of the undersigned as an officer and/or director of said corporation to any application, statement, petition, prospectus, notice or other instrument or document, or to any amendment thereto, or to any exhibit filed as a part thereto or in connection therewith, which is required to be signed by the undersigned and to be filed with the public authority or authorities administering said securities or blue sky laws for the purpose of so registering or licensing said corporation; and the undersigned does hereby ratify and confirm as his own act and deed all that said attorney and agent shall do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has subscribed these presents this 8th day of April, 1997. /s/ Thomas F. Conroy - --------------------- In the Presence of: /s/ Shirley A. Knarr ---------------------- POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned, an officer and/or director of Security Life of Denver Insurance Company, a life insurance corporation organized and existing under the laws of Colorado, does hereby constitute and appoint John R. Barmeyer, Edward K. Campbell, Carol D. Hard, Shirley A. Knarr, and each of them, with full power of substitution as his true and lawful attorney and agent, to do any and all acts and things and to execute any and all instruments which said attorney and agent may deem necessary or advisable: (i) to enable the said corporation to comply with the Securities Act of 1933, as amended, the Investment Company Act of 1940, as amended, and any rules, regulations and requirements of the Securities and Exchange Commission in respect hereof, in connection with the registration under the said Securities Act and the Investment Company Act of variable life insurance contracts and variable annuity contracts of the said corporation (hereinafter collectively called "SLD Securities"), including specifically, but without limiting the generality of the foregoing, the power and authority to sign for and on behalf of the undersigned the name of the undersigned as officer and/or director of the said corporation to a registration statement or to any amendment thereto filed with the Securities and Exchange Commission in respect to said SLD Securities and to any instrument or document filed as part of, as an exhibit to or in connection with, said registration statement or amendment; and (ii) to register or qualify said SLD Securities for sale and to register or license said corporation or any subsidiary thereof as a broker or dealer in said SLD Securities under the securities or Blue Sky Laws of all such states as may be necessary or appropriate to permit therein the offering and sale of said SLD Securities as contemplated by said registration statement, including specifically, but without limiting the generality of the foregoing, the power and authority to sign for and on behalf of the undersigned the name of the undersigned as an officer and/or director of said corporation to any application, statement, petition, prospectus, notice or other instrument or document, or to any amendment thereto, or to any exhibit filed as a part thereto or in connection therewith, which is required to be signed by the undersigned and to be filed with the public authority or authorities administering said securities or blue sky laws for the purpose of so registering or licensing said corporation; and the undersigned does hereby ratify and confirm as his own act and deed all that said attorney and agent shall do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has subscribed these presents this 16th day of April, 1997. /s/ Michael W. Cunningham - -------------------------- In the Presence of: /s/ Irene M. Colorosa ----------------------- POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned, an officer and/or director of Security Life of Denver Insurance Company, a life insurance corporation organized and existing under the laws of Colorado, does hereby constitute and appoint Bonnie C. Daily, Frank Wright and Edward K. Campbell and each of them, with full power of substitution as his true and lawful attorney and agent, to do any and all acts and things and to execute any and all instruments which said attorney and agent may deem necessary or advisable: (i) to enable the said corporation to comply with the Securities Act of 1933, as amended, the Investment Company Act of 1940, as amended, and any rules, regulations and requirements of the Securities and Exchange Commission in respect hereof, in connection with the registration under the said Securities Act and the Investment Company Act of variable life insurance contracts and variable annuity contracts of the said corporation (hereinafter collectively called "SLD Securities"), including specifically, but without limiting the generality of the foregoing, the power and authority to sign for and on behalf of the undersigned the name of the undersigned as officer and/or director of the said corporation to a registration statement or to any amendment thereto filed with the Securities and Exchange Commission in respect to said SLD Securities and to any instrument or document filed as part of, as an exhibit to or in connection with, said registration statement or amendment; and (ii) to register or qualify said SLD Securities for sale and to register or license said corporation or any subsidiary thereof as a broker or dealer in said SLD Securities under the securities or Blue Sky Laws of all such states as may be necessary or appropriate to permit therein the offering and sale of said SLD Securities as contemplated by said registration statement, including specifically, but without limiting the generality of the foregoing, the power and authority to sign for and on behalf of the undersigned the name of the undersigned as an officer and/or director of said corporation to any application, statement, petition, prospectus, notice or other instrument or document, or to any amendment thereto, or to any exhibit filed as a part thereto or in connection therewith, which is required to be signed by the undersigned and to be filed with the public authority or authorities administering said securities or blue sky laws for the purpose of so registering or licensing said corporation; and the undersigned does hereby ratify and confirm as his own act and deed all that said attorney and agent shall do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has subscribed these presents this 17th day of May, 1995. /s/ Linda B. Emory - ------------------- Linda B. Emory In the Presence of: /s/ Wendy Waterman -------------------- POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned, an officer and/or director of Security Life of Denver Insurance Company, a life insurance corporation organized and existing under the laws of Colorado, does hereby constitute and appoint John R. Barmeyer, Edward K. Campbell, Carol D. Hard, Shirley A. Knarr, and each of them, with full power of substitution as his true and lawful attorney and agent, to do any and all acts and things and to execute any and all instruments which said attorney and agent may deem necessary or advisable: (i) to enable the said corporation to comply with the Securities Act of 1933, as amended, the Investment Company Act of 1940, as amended, and any rules, regulations and requirements of the Securities and Exchange Commission in respect hereof, in connection with the registration under the said Securities Act and the Investment Company Act of variable life insurance contracts and variable annuity contracts of the said corporation (hereinafter collectively called "SLD Securities"), including specifically, but without limiting the generality of the foregoing, the power and authority to sign for and on behalf of the undersigned the name of the undersigned as officer and/or director of the said corporation to a registration statement or to any amendment thereto filed with the Securities and Exchange Commission in respect to said SLD Securities and to any instrument or document filed as part of, as an exhibit to or in connection with, said registration statement or amendment; and (ii) to register or qualify said SLD Securities for sale and to register or license said corporation or any subsidiary thereof as a broker or dealer in said SLD Securities under the securities or Blue Sky Laws of all such states as may be necessary or appropriate to permit therein the offering and sale of said SLD Securities as contemplated by said registration statement, including specifically, but without limiting the generality of the foregoing, the power and authority to sign for and on behalf of the undersigned the name of the undersigned as an officer and/or director of said corporation to any application, statement, petition, prospectus, notice or other instrument or document, or to any amendment thereto, or to any exhibit filed as a part thereto or in connection therewith, which is required to be signed by the undersigned and to be filed with the public authority or authorities administering said securities or blue sky laws for the purpose of so registering or licensing said corporation; and the undersigned does hereby ratify and confirm as his own act and deed all that said attorney and agent shall do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has subscribed these presents this 15th day of April, 1997. /s/ R. Glenn Hilliard - ---------------------- In the Presence of: /s/ Judy R. Martin -------------------- EX-27 11 EXHIBIT 27
6 YEAR DEC-31-1996 JAN-01-1996 DEC-31-1996 54,275,545 57,137,579 0 0 0 57,137,579 0 0 (719,248) (719,248) 0 0 0 0 0 0 0 0 0 57,856,827 1,183,779 0 0 241,127 942,652 401,852 2,675,307 4,019,811 0 0 0 0 5,742,883 2,615,086 0 44,630,293 0 0 0 0 0 0 0 35,541,681 0 0 0 0 0 0 0 0 0 0
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